Nicola Gennaioli, Alberto Martin, Stefano Rossi, 19 July 2014

There is growing concern – but little systematic evidence – about the relationship between sovereign default and banking crises. This column documents the link between public default, bank bondholdings, and bank loans. Banks hold many public bonds in normal times (on average 9% of their assets), particularly in less financially developed countries. During sovereign defaults, banks increase their exposure to public bonds – especially large banks, and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults.

Marcus Miller, Lei Zhang, 26 June 2014

Like banks, indebted governments can be vulnerable to self-fulfilling financial crises. This column applies this insight to the Eurozone sovereign debt crisis, and explains why the ECB’s Outright Monetary Transactions policy reduced sovereign bond spreads in the Eurozone.

Paolo Manasse, 31 January 2014

Sales of state-owned assets have been proposed as a way for highly-indebted countries to ease the pain of fiscal consolidation. This column argues that, despite the potential merits of privatisation in terms of long-run efficiency, in practice it is unlikely to improve short-run fiscal solvency. Since governments rarely alienate control rights, the efficiency gains from privatisations are often small. Moreover, financial markets may not fully reflect these gains – particularly during a financial crisis. The implication is that the Troika policy of linking financial assistance to privatisations is inappropriate and self-defeating.

Charles Yuji Horioka, Takaaki Nomoto, Akiko Terada-Hagiwara, 21 January 2014

Japan’s sovereign debt-to-GDP ratio is higher than any country in Europe and more than twice the OECD average. This column explains why Japan’s massive government debt did not wreak havoc in the past. Robust domestic saving and a temporary inflow of foreign capital caused by the Global Crisis have prevented a crisis thus far. As both of these factors become less applicable the government faces pressure to reduce debt-to-GDP ratio can be brought under control quickly.

Willem Buiter, 10 January 2014

Fiscal sustainability has become a hot topic as a result of the European sovereign debt crisis, but it matters in normal times, too. This column argues that financial sector reforms are essential to ensure fiscal sustainability in the future. Although emerging market reforms undertaken in the aftermath of the financial crises of the 1990s were beneficial, complacency is not warranted. In the US, political gridlock must be overcome to reform entitlements and the tax system. In the Eurozone, creating a sovereign debt restructuring mechanism should be a priority.

Ashoka Mody, 07 January 2014

On 19 October 2010, Angela Merkel and Nicolas Sarkozy agreed that in future, sovereign bailouts from the European Stability Mechanism would require that losses be imposed on private creditors. This agreement was blamed for the increase in sovereign spreads in late 2010 and early 2011. This column discusses recent research on the market reaction to the surprise announcement at Deauville. With the exception of Greece, the rise in spreads was within the range of variability established in the previous 20 days.

Kaushik Basu, Joseph Stiglitz, 02 January 2014

The Eurozone crisis exposed weaknesses in the Eurozone’s design. This column – by Nobelist Joe Stiglitz and World Bank Chief Economist Kaushik Basu – argues that the Eurozone’s financial architecture can be improved by amending the Treaty of Lisbon to permit appropriately structured cross-country liability for sovereign debt incurred by EZ members.

Martin Brooke, Rhys Mendes, Alex Pienkowski, Eric Santor, 12 December 2013

Recent Eurozone events have changed the perception that sovereign debt is a problem of emerging-market economies. This column highlights some major deficiencies of the current framework, and proposes two new and complementary types of state-contingent debt contracts. The first – sovereign cocos – are designed to tackle liquidity crises. The second – GDP-linked bonds – help prevent solvency crises.

Mike Wickens, Vito Polito, 30 October 2013

A good credit rating has become a key fiscal objective, even if it requires austerity when unemployment is high. Recent experience has raised doubts about the sovereign ratings provided by the credit-rating agencies. This column suggests a new way to measure credit ratings based on a country’s ability to meet its liabilities using fiscal policy. This measure would have identified and signalled to market participants signs of the impending European sovereign-debt crisis well before 2010, when the rating agencies first reacted to the crisis.

Carlos Álvarez-Nogal, Christophe Chamley, 21 October 2013

The recent showdown over the US debt ceiling can be thought of as a game of chicken over the repayment of sovereign debt, with potentially severe consequences. This column describes an analogous historical episode in Spain, in which city delegates in the Cortes resisted tax increases, and Phillip II responded by suspending payments on a portion of the sovereign debt. By the time the cities caved to a doubling of their tax contribution two years later, the resulting bank failures and credit freeze had caused lasting economic damage.

Alexander Popov, Neeltje van Horen, 06 July 2013

The European sovereign-debt crisis has raised many questions regarding the link between sovereigns and banks. This column goes to the heart of one and shows that tensions in Eurozone government-bond markets were transmitted internationally through the bank lending channel. Lending by European banks with sizeable exposures to sovereign debt from the troubled Eurozone countries became impaired after the start of the crisis, resulting in a reallocation away from foreign (especially US) markets.

Bernhard Bartels, Beatrice Weder di Mauro, 04 July 2013

US-based credit-rating agencies are regularly subject to condemnation for causing or amplifying financial crises – the Eurozone Crisis in particular. Should Europe try to set up a European agency to counter this? This column discusses evidence that shows that the largest German rating agency was more aggressive than the US Big Three both in terms of a lower level and a higher propensity to quickly downgrade Eurozone problem countries.

Edda Zoli, 15 June 2013

What has driven Italian sovereign spreads movements? This column presents new research looking into increased volatility in sovereign debt since the summer of 2011. Shocks in investor risk appetite, news related to the Eurozone debt crisis, and consistently bad news in Italy, have been important drivers of Italian sovereign spreads. These findings mean that we need to reduce country-specific vulnerabilities as well as sorting out the Eurozone.

Udaibir Das, Michael Papaioannou, Christoph Trebesch, 28 November 2012

There is an ongoing debate about debt restructurings, debt buybacks and other strategies to resolve sovereign debt crises. Unfortunately there is limited empirical knowledge about the process and outcome of past restructurings to guide the debate and help tackle future crises. This column is an attempt to fill this gap by surveying new data and lessons learned from debt crises of the past six decades.

William Cline, 30 August 2012

Interest rates on Italian and Spanish bonds are back up to their 2011 levels, raising alarm bells across Europe. But this column argues that the media’s hard-held belief that neither Italy nor Spain can withstand interest rates of 7% is wrong.

João Fonseca, Pedro Santa-Clara, 11 May 2012

Eurobonds have been proposed as a solution to the crisis, but Germany is wary of guaranteeing the entire debt of EZ countries. This column suggests the more politically feasible Euro-coupon solution. EZ countries would issue bonds at market interest rates and transfers between countries would harmonise the effective interest rates.

Ugo Panizza, Andrea Presbitero, 22 April 2012

Countries with high public debt tend to grow slowly – a correlation often used to justify austerity. This column presents new evidence challenging this view. The authors point out that correlation does not imply causality – it may be that slow growth causes high debt. They argue that policymakers should be wary – the case for cutting debt to boost growth still needs to be made.

Viral Acharya, Philipp Schnabl, Itamar Drechsler, 15 April 2012

The deadliest aspect of the Eurozone crisis is the tripwire linking the riskiness of banks and governments. This column provides evidence of the link and explains how it arose. It argues that given the near-chaos-like interaction, the zero risk weights on sovereign bonds should be revisited.

Jeromin Zettelmeyer, Mitu Gulati, 05 March 2012

One of the most interesting questions arising from the ongoing Greek debt restructuring is what it implies about the feasibility of voluntary debt restructurings. Indeed, why would anyone voluntarily take a debt-exchange offer that promises a large reduction in repayments? This column argues creditors might feel safer with new debt instruments issued under English law than with old Greek-law regulated ones.

Camila Campos, Dany Jaimovich, Ugo Panizza, 17 January 2012

How do countries get into debt? And how does this debt rise so fast? The short answer may be obvious, but this column shows that the longer answer certainly isn’t.

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