Daniel Gros, 05 April 2020

The countries hit hardest by the COVID-19 crisis already have too much debt. Lending from the European Stability Mechanism or via Coronabonds would add to that debt, potentially making it unsustainable. This column suggests that European solidarity should take the form of transfers, not credit. A substantial transfer could be organised via the EU budget simply by exempting the weakest countries from their contributions to the EU budget for the duration of the programming period 2012-2027.

Aitor Erce, Antonio Garcia Pascual, Toni Roldán Monés, 25 March 2020

The amount of financial resources needed to fight the COVID-19 is so large that most euro area member states will need a backstop from Europe. This column discusses how to use the European Stability Mechanism toolbox to finance the fight, using Spain as an example. It shows that an ESM loan with low margins and a smoothed repayment schedule would stabilise debt stocks and gross financing needs, and that ESM financing could help Spain save around €150 billion in interest payments between 2020 and 2030. A combination of bold ESM and ECB support could reinforce Spain’s debt sustainability after the COVID-19 shock, and could do the same for other member states. 

M. Ayhan Kose, Peter Nagle, Franziska Ohnsorge, Naotaka Sugawara, 16 March 2020

The global economy has experienced four waves of rapid debt accumulation in emerging and developing economies over the past 50 years. This column examines these waves of debt and puts the fourth (current) wave in historical context. The current wave of debt, which started in 2010, stands out for its exceptional size, speed, and breadth. While the previous three waves all ended with widespread financial crises, policymakers have a range of options to reduce the likelihood of the current debt wave ending in crisis.

Maryam Malakotipour, Enrico Perotti, Rolef de Weijs, 24 February 2020

In 2019 the EU published its directive on bankruptcy reform, which national parliaments must now consider. This column argues the Relative Priority Rule that the reforms propose is unfair, would reduce financial stability, and may lead to a regulatory race to the bottom. The rule would aggravate risk-taking because returns would be captured by shareholders while losses would be borne by unsecured creditors. 

Jeffrey Chwieroth, Andrew Walter, 15 November 2019

When there's a financial crisis, policymakers and politicians increasingly kowtow to the demands of an influential group: the global middle class. Jeffrey Chwieroth and Andrew Walter tell Tim Phillips how their Great Expectations are destabilising the world economy.

Marzio Bassanin, Ester Faia, Valeria Patella, 30 August 2019

Macroeconomic models with credit frictions do a good job of explaining debt falls during financial crises, but fail to account for pre-crisis debt increases and level pro-cyclicality. This column introduces a model in which investors’ beliefs about future collateral values are non-linear. Greater ambiguity optimism during booms and greater aversion during recessions closely model the empirical shifts seen before and during financial crises, highlighting the joint role of financial frictions and beliefs distortions for market developments.

Jeffrey Chwieroth, Andrew Walter, 03 June 2019

The accumulation of mass financialised wealth has transformed the politics of banking crises. This column shows that the rising wealth of the middle classes has generated great expectations that their wealth will be protected by the government. As a result, democracies perform more financial sector bailouts and are also more financially fragile and politically unstable. 

Cinzia Alcidi, Daniel Gros, 23 May 2019

The relationship between high public debt and low interest rates is once again at the forefront of debate. This column shows that countries with high debt levels pay a risk premium. This creates the potential for self-reinforcing loops of high debt and high risk premia, which can become explosive. 

Marika Cioffi, Marzia Romanelli, Pietro Rizza, Pietro Tommasino, 19 April 2019

During the euro area sovereign crisis we saw contagion and increased interdependence, with the risk of systemic crises. This column sets out a plan to create a European debt redemption fund that pools a portion of sovereign debt. The fund could also become the basis for further euro area reform.

Johan Almenberg, Annamaria Lusardi, Jenny Säve-Söderbergh, Roine Vestman, 27 October 2018

Household indebtedness is high in many countries, and continues to rise. This column uses data from Sweden to argue that evolving attitudes toward debt may help explain the observed increase. Individuals who report being comfortable with debt have considerably more of it, and they are more likely to have parents who were also comfortable with debt. For others, discomfort with debt may act as a self-imposed borrowing constraint. 

Anat Admati, 29 March 2018

Nearly a year on from the Global Crisis, many argue that the international banking system remains broken. Anat Admati discusses how the structure of banks makes them fragile, and why they should be regulated in order to withstand shocks. 

Andrew Scott, 12 June 2017

What is the right level of government debt and what type of debt should be issued? In this video, Andrew Scott discusses how long-term bonds affected the level of national debt. This video was recorded at the Royal Economic Society Annual Conference held in Bristol in April 2017.

Tom Best, Christopher Dielmann, Meghan Greene, Tania Mohd Nor, 06 June 2017

State-contingent debt instruments could provide sovereigns with additional policy space in bad states of the world. This column presents an Excel-based tool that allows debt managers and investors to explore the impact of different designs of such instruments on public debt and gross financing needs under user-specified macroeconomic scenarios (both baseline and shocks). Illustrative results show the potential benefits of different bond designs on both debt and gross financing needs.

Myrvin L. Anthony, Narcissa Balta, Tom Best, Sanaa Nadeem, Eriko Togo, 06 June 2017

The case for state-contingent debt instruments, linking contractual debt to a pre-defined variable, has been theorised but not developed. This column gives a historical perspective of the issuance of these instruments to alleviate liquidity and/or solvency pressures on the sovereign in ‘normal times’ and during restructurings. It also discusses the valuable lessons that inflation-linked bonds provide for development of the state-contingent debt instrument market.

S. M. Ali Abbas, Daniel Hardy, Jun Kim, Alex Pienkowski, 06 June 2017

The theoretical benefits of state-contingent debt instruments for sovereigns – such as GDP-linked and extendible bonds – have been advocated by academics for several decades, but only recently have the practical constraints and considerations been explored in detail. This column summarises this more recent work, highlighting key findings on instrument design and on broader market development prospects. 

Keiichiro Kobayashi, 02 May 2017

There is concern about the persistent slowdown of economic growth in the aftermath of financial crises. This column presents a framework which shows that excessive debt accumulated by firms and households during a crisis can cause persistent stagnation. Relief from excessive debt has a direct impact on economic growth, whereas unconventional monetary and fiscal policies cannot directly solve the fundamental debt problem.

Christopher House, Christian Proebsting, Linda Tesar, 11 April 2017

Austerity policies implemented during the Great Recession have been blamed for the slow recovery in several European countries. Using data from 29 advanced economies, this column shows that austerity policies negatively affect economic performance by reducing GDP, inflation, consumption, and investment. It also warns that efforts to reduce debt through austerity in the depths of the economic recession were counterproductive.

Bruno Cabrillac, Ludovic Gauvin, Jean-Baptiste Gossé, 07 March 2017

Interest in nominal GDP-indexed bonds has grown in the context of the debate on how to prevent future sovereign debt crises. This column uses simulations up to 2040 to identify which countries would benefit from using such bonds instead of conventional debt. By issuing GDP-indexed bonds, these countries would protect their debt ratios against deflation and recession, and investors could benefit from the catching-up of emerging economies, could partially hedge their currency risk, and could diversify their portfolio compared to equity. The contribution of GDP-indexed bonds to international financial stability would justify international coordination to promote their use.

Barry Eichengreen, Poonam Gupta, Oliver Masetti, 24 February 2017

According to conventional wisdom, capital flows are fickle. Focusing on emerging markets, this column argues that despite recent structural and regulatory changes, much of this wisdom still holds today. Foreign direct investment inflows are more stable than non-FDI inflows. Within non-FDI inflows, portfolio debt and bank-intermediated flows are most volatile. Meanwhile, FDI and bank-related outflows from emerging markets have grown and become increasingly volatile. This finding underscores the need for greater attention from analysts and policymakers to the capital outflow side.

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