Between 1870 and 1914, 68 countries – both sovereign and British colonies – used the London Stock Exchange to issue bonds. This column argues that bond prices and spreads in this period show that the colonies’ semi-sovereignty lowered credit risk at the price of higher illiquidity risk, and further worsened liquidity by attracting investors that rarely traded. Parallels between Eurozone and colonial bonds suggest that the pricing of liquidity and credit in government bond markets is an institutional phenomenon.
Matthieu Chavaz, Marc Flandreau, 01 December 2016
Gregori Galofré-Vilà, Martin McKee, Christopher Meissner, David Stuckler, 09 October 2016
In 1953, the Western Allied powers approved the London Debt Agreement, a radical plan to eliminate half of Germany’s external debt and create generous repayment conditions for the remainder. Using new data from the historical monthly reports of the Deutsche Bundesbank, this column argues that the agreement spurred economic growth by creating fiscal space for public investment, lowering costs of borrowing, and stabilising inflation.
Fabrice Collard, Habib Michel, Jean-Charles Rochet, 13 July 2016
Since the Global Crisis, sovereign debt levels have exploded in many OECD countries. This column presents a new measure of government debt – maximum sustainable debt. This measure takes account of the fact that a shortfall in growth naturally increases the probability of default, while allowing for the possibility of rollover. Applications to recent data suggest that without sufficient institutional constraints, governments will generally borrow up to a level close to the maximum that can be sustained.
Luis Catão, Rui Mano, 29 September 2015
Sovereign governments re-entering capital markets after debt renegotiations pay an interest rate premium for past defaults. This column presents new evidence that suggests earlier studies have underestimated this premium. This is partly due to the narrow credit history indicators used in previous studies as well as the narrow data coverage. Correcting for these problems, a sizeable and persistent default premium emerges, and one which rises on the duration of the default. The new findings are consistent with the view that financial markets help discipline governments and rationalise why governments try hard not to default.
Timothy Guinnane, 13 August 2015
Greece’s crisis has invited comparisons to the 1953 London Debt Agreement, which ended a long period of German default on external debt. This column suggests that looking back, the 1953 agreement was unnecessarily generous given that Germany’s rapid growth lightened the debt repayment burden. Unfortunately for Greece, the motivations driving the 1953 agreement are nearly entirely absent today.
Matthias Schlegl, Christoph Trebesch, Mark Wright, 11 August 2015
Greece is the first developed country to default on the IMF. But it continues to service its debt owed to private bondholders. How does this compare to historical experience? This column presents new evidence on seniority in sovereign debt markets. Despite the lack of a sovereign insolvency procedure, there is a clear-cut pecking order of sovereign debt repayments, which holds across countries and over time. Greece is an outlier case, and the Eurozone rescue loans face an elevated risk of arrears and haircuts in the future.
Sebastian Edwards, 04 March 2015
There were 24 sovereign defaults and debt restructurings between 1997 and 2013. Using data on 180 debt restructurings – for both sovereign bonds and sovereign syndicated bank loans – this column argues that the roughly 75% ‘haircut’ Argentina imposed on its creditors in 2005 was an outlier. Greece’s ‘haircut’ of roughly 64% in 2012, by contrast, was in line with previous experience.
Stijn Claessens, 18 April 2014
Stijn Claessens talks to Viv Davies about the recent IMF book titled 'Global Crises: Causes, Consequences and Policy Responses', co-edited with M Ayhan Kose, Luc Laeven, and Fabian Valencia. The book provides a comprehensive overview of current research into financial crises and the policy lessons learned. They discuss crisis prevention and management, and the crisis in the Eurozone. The interview was recorded in April 2014.
Mickey Levy, Peter Kretzmer, 16 May 2012
Greece’s economic and financial crisis is quickly deteriorating and there is no strategy – or even a coalition government – to figure out what to do next. This column looks at the lessons from Argentina’s default in 2001 and argues that Greece’s road to necessary economic reforms, fiscal sustainability and recovery may be even more daunting.
Willem Buiter, 20 February 2012
Willem Buiter talks to Viv Davies about Greece and the Eurozone. Buiter believes that Greece’s public debt should be written off, it’s banks recapitalised and that the country be provided with sufficient conditional support to grow its economy. They discuss the LTROs and the risks of loss of control over the aggregate size of the balance sheet and potential national central bank insolvencies. Buiter suggests that now is not the time for self-righteousness amongst European policymakers. The interview was recorded on 17 Feb 2012. [Also read the transcript]
Carmen Reinhart, 09 January 2012
Financial crises often unfold according to common patterns, but the post-2007 contraction is in fact different from other post-WWII crises in its unusual severity, says Carmen Reinhart in CEPR DP8742. But the patterns of past crises may still provide clues on the future of housing, labour, and international financial markets. This paper outlines what that future might look like.
Paolo Manasse, 02 December 2011
Paolo Manasse talks to Viv Davies about Italy and the Eurozone crisis. They discuss the economic and political challenges currently facing Italy, how a eurozone fiscal union might work in practice and the role of eurobonds. Manasse explains the trade-off between addressing sovereign debt in the peripheral economies and establishing broader financial stability across the Eurozone; he maintains that an expansionary ECB monetary policy is an important part of the solution. The interview was recorded on 30 November 2011. [Also read the transcript]
Harry Huizinga, 18 November 2011
Harry Huizinga talks to Viv Davies about his recent paper on the EFSF. Huizinga concludes that the creation of the EFSF has resulted in the bail out of both banks and countries, that the use of EFSF funds has been expensive and inefficient, and that there is a limit to the extent to which the EFSF can be scaled up. Nevertheless, he suggests that this may be a blessing in disguise. The interview was recorded on 17 November 2012.
Dimitri Vayanos, 11 November 2011
Dimitri Vayanos of the London School of Economics talks to Viv Davies about Greece and the eurozone crisis, and argues that leaving the euro would be a disaster for both Greece and Europe. They discuss the bailout package, the appointment of Lucas Papademos as Prime Minister and the benefits of a coalition government of technocrats. Vayanos maintains that the emphasis for Greece should be on deeper institutional and structural reforms. The interview was recorded on 10 November 2011.
Charles Wyplosz, 04 November 2011
Greek Prime Minister Papandreou made a stand this week. Even though he was backed down, this column argues that he did the EZ a favour by providing an opportunity to change course. One way or another, a disorderly Greek default is in the cards with its attendant contagion. At that point a real solution is inevitable – one that requires EZ leaders and the ECB to play on the same side with credible rules for all.
Eduardo Levy Yeyati, Maria Soledad Martinez Peria, Sergio Schmukler, 29 June 2011
As strikes and protests continue throughout Greece against the latest economic rescue plan, this column asks whether government inaction could lead to a run on Greek banks by ordinary depositors that would derail any existing restructuring plans and force Greece to default.
Olivier Jeanne, Patrick Bolton, 25 April 2011
The Eurozone crisis has thrown into relief the dangers of financial contagion. The authors of CEPR DP8358 analyze the causes and consequences of sovereign debt crises in zones with financial integration. They conclude that without fiscal integration, the supply of government debt in these areas reaches an inefficient equilibrium, with safer governments inefficiently issuing too little of their high-quality debt and riskier governments issuing too much.
Carmen Reinhart, Kenneth Rogoff, 28 March 2011
With public debt in the US higher than it's been since 1945 and private debt burgeoning, governments are panicking about the impact of debt overhang on growth. In CEPR DP8310, Reinhart and Rogoff argue that governments have increasingly resorted to undercover restructuring by using the tools of "financial repression" that characterized the Bretton Woods era. If states continue to ignore or distort their debt problems, the authors predict, their bond markets could become ever more repressed.
Nicola Gennaioli, Alberto Martin, Stefano Rossi, 17 November 2010
Recent sovereign defaults in developing countries have put severe strain on the defaulting country’s banking system. This column argues that these events teach us how the development of private financial markets plays a critical role in reducing the risk of government default and thus in supporting public borrowing.
Andrew Scott, 11 March 2010
The high levels of government debt have raised concern among policymakers and commentators. But this column argues that markets have financed much larger levels of debt than are currently predicted for the UK and US. Given the enormous financial shock these economies have experienced, they might actually be better off with high debt for a long period of time.