Julian Schumacher, Christoph Trebesch, Henrik Enderlein, 16 July 2018

For centuries, sovereign debt was assumed to be ‘above the law’ and non-enforceable. This column shows that this is no longer the case. Building on a new dataset on sovereign debt lawsuits, it documents the erosion of sovereign immunity since the 1970s and argues that legal disputes can disrupt government access to international capital markets, as foreign courts impose a financial embargo on defaulting sovereigns. These legal developments have strengthened the hands of creditors and raised the cost of default for debtors, with far-reaching consequences for government willingness to pay and the resolution of debt crises.

Silvia Marchesi, Tania Masi, 06 July 2018

Euro area governments have just negotiated a debt relief agreement for Greece, but without face-value debt reduction. This column argues that specific characteristics of sovereign debt renegotiations have significant economic implications. When debt relief operations involve write-offs, the defaulting country benefits strongly in term of growth up to ten years after the restructuring. 

Guntram Wolff, 04 May 2018

When thinking about what will determine the prosperity and well-being of citizens living in the euro area, five issues are central. This column, part of VoxEU's Euro Area Reform debate, argues that the important CEPR Policy Insight by a team of French and German economists makes an important contribution to two of them, but leaves aside some of the most crucial ones: European public goods, a proper fiscal stance and major national reforms. It also argues that its compromise on sovereign debt appears unbalanced.

Stefano Micossi, 05 April 2018

A recent report by a group of French and German economists proposed a set of reforms to improve euro area’s financial stability, political cohesion, and potential for delivering prosperity to its citizens. This column, which joins VoxEU's Euro Area Reform debate, discusses some specific aspects of the proposals that in the author’s view deserve further clarification, and considers the overall implications of the proposals for financial stability of the euro area.

Robert Shiller, Jonathan D. Ostry, James Benford, Mark Joy, 16 March 2018

While the idea of governments issuing debt instruments whose repayments are indexed to GDP is not new, the current global backdrop of high government debt suggests the case for doing so might be especially strong now. This column introduces a new eBook in which leading economists, lawyers, and investors examine the case for issuing GDP-linked bonds, the obstacles to market development, ways of overcoming them, and what such a security might look like in practice.

Mark Aguiar, 13 March 2018

In the traditional framework, sovereigns face default if they cannot repay maturing debt. Mark Aguiar discusses the concept of 'rollover crises', in which sovereigns can find new debt to pay off maturing debt - but at high spreads. He proposes a way to structure this ahead of time, that reduces the cost to the government. This video was published by the ADEMU Project in November 2016.

Jonathan Eaton, 09 March 2018

The sovereign debt crisis no doubt heavily impacted the Euro Area as it ran its course, but its longer-term implications for the evolution of Europe remain unclear. Jonathan Eaton discusses some of the similarities and differences between the sovereign debt problems of the 1970s-80s and today, and their implications for the future. This video was published by the ADEMU Project in November 2016.

Daniel Gros, 27 November 2017

A key remaining issue for the completion of the Banking Union is the concentrated exposure of banks in many countries to their own sovereign. This column argues that the belief that banks should be allowed to buy large amounts of their own sovereign so they can stabilise the market in a crisis is mistaken for two reasons: banks are only intermediaries, and banks have higher cost of funding. The overall conclusion is that governments should make it more attractive for households (and other real money investors) to hold government debt directly. 

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.

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. 

Jean-Pierre Landau, 24 November 2016

The objectives of maximising growth and reducing external imbalances may not be fully compatible in a financially integrated and asymmetric world. This column argues that countries have two choices: they can contain global imbalances and gross financial flows through permanent capital controls, or they can pursue financial integration, managing growing imbalances and external exposures by creating more global safe assets. This implies debt contracts would be either state-contingent, with easy restructuring, or built to be ‘safe’, with a high level of commitment by the issuer.

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.

Pierre-Olivier Gourinchas, Thomas Philippon, Dimitri Vayanos, 05 August 2016

The Greek crisis is one of the worst in history, even in the context of recorded ‘trifecta’ crises – the combination of a sudden stop with output collapse, a sovereign debt crisis, and a lending boom/bust. This column quantifies the role of each of these factors to better understand the crisis and formulate appropriate policy responses. While fiscal consolidation was important in driving the drop in output, it accounted for only for half of that drop. Much of the remainder can be explained by the higher funding costs of the government and private sectors due to the sudden stop. 

Charles Wyplosz, 01 August 2016

The German Council of Economic Advisors recently proposed a mechanism for the orderly restructuring of sovereign debt in the Eurozone. This column argues that the proposal suffers from some inherent weaknesses. The proposal builds on logical errors and embeds well-established ideas in a setup that suffers from serious limitations. It also neglects alternative strategies that favour targeting large debts as soon as possible.

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The conference, jointly organised with Horizon 2020 ADEMU and The European Stability Mechanism (ESM), aims to bring together leading scholars to discuss theoretical and empirical issues in sovereign debt sustainability. In particular, we are interested in papers that deal with debt maturity structure, official lending, crisis resolution frameworks, and multiple equilibria, among others. The goal is to identify priorities for both future research and policy-making as it relates to recent developments in the Euro Area and multilateral lending frameworks. The conference will be structured to facilitate interaction and discussion among leading academics and policymakers. 

Jochen Andritzky, Lars Feld, Christoph Schmidt, Isabel Schnabel, Volker Wieland, 21 July 2016

To make the no-bailout clause credible and to enhance the effectiveness of crisis assistance, private creditors should contribute to crisis resolution in the Eurozone. This column proposes a mechanism to allow for orderly restructuring of sovereign debt as part of ESM programmes. If debt exceeds certain thresholds, the mechanism triggers an immediate maturity extension. In a second stage, a deeper debt restructuring could follow, depending on the solvency of a country. The mechanism could be easily implemented by amending ESM guidelines. 

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.

Steven Ongena, Alexander Popov, Neeltje van Horen, 17 March 2016

The European sovereign debt crisis has triggered speculation that part of the increase in banks’ holdings of domestic sovereign debt was driven by ‘moral suasion’ by governments. This column shows that domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of sovereign bonds in those months when the government had to issue a large amount of new debt. This suggests that governments indeed ‘morally sway’ their banks to purchase domestically issued sovereign bonds when sovereign bond markets are stressed.

Peter Goves, Michael Spies, Alessandro Tentori, 02 March 2016

Sovereign risk and its treatment by European banks is a frequently debated topic. In particular, regulators are focusing on zero risk weighting and large exposure limits. This column argues that redesigning the macroprudential framework for sovereign risk management will be a key theme in the years to come. Depending on the exact outcome, the structure of the EZ bond market might look very different from its current shape. This could have far-reaching consequences for both the ECB’s monetary policy strategy and investors alike.

Daniel Gros, 12 February 2016

The Eurozone’s ‘Banking Union’ created a system of banking supervision and a common institution to restructure troubled banks. There remain two issues, however, that need to be addressed:  banks are holding too much debt of their own sovereign, and deposit insurance is only backstopped at the national level. This column argues that these issues need to be addressed simultaneously for economic and political reasons. Specifically, periphery and core countries hold opposing positions on remedies to the respective problems. A combination of the two makes economic sense and could represent an acceptable political compromise.

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