Sovereign Debt Crisis Research Articles

Zombie firms and resource allocation: research trends and developments during the spread of COVID-19 1

ABSTRACT We identify so-called “zombie firms,” which survive with banks’ and governments’ support despite performing poorly without the prospect of recovery, using firms’ financial data. We set the criteria of the zombie firms by arranging methodologies proposed by the existing studies. It mainly focuses on Japan after the collapse of its bubble economy, European countries after the global financial crisis and the sovereign debt crises, China under debt expansion, and developed countries during the spread of COVID-19. The analysis shows that the number of zombie firms surged after the collapse of the bubble economy in the early 1990s in Japan. At least based on the currently available data in fiscal 2020 after the spread of COVID-19, we do not detect a problematic growth in the number of zombie firms as in the 1990s.

Euro sovereign debt crisis: moral suasion in GIPS government bond funds

ABSTRACT This study is the first to test whether moral suasion is the main driver of the increasing home bias in Euro government bond mutual funds after the Euro debt crisis, with a focus on the most financially stressed economies during this period: Greece, Italy, Portugal, and Spain (GIPS). The findings reject the potential spillover effect of this type of financial repression of the previously documented European Union banking sector in GIPS government bond funds. The results reveal that informal pressure by performance-chasing unitholders might act as an effective self-control mechanism in moral suasion channels in the mutual fund industries of fiscally stressed countries.

Political uncertainty and sovereign bond markets

AbstractWe analyze the effects of political uncertainty on prices and liquidity of sovereign bonds. Specifically, we investigate Italian government bonds during the European sovereign debt crisis and focus on political summits and elections. We find a significant drop in prices in combination with high illiquidity and sell-side pressure before the events. The event returns are significantly positive and followed by a positive price trend. The effects are stronger when uncertainty, as measured by the EPU index, is high and economic conditions are weak. In addition, political uncertainty also affects the primary market and we find significant costs associated with issuing sovereign bonds in highly uncertain times.

Comprehensive, Fair and Speedy Resolution of Sovereign Debt Crises through New Law in Capital-market Countries

Comprehensive, Fair and Speedy Resolution of Sovereign Debt Crises through New Law in Capital-market Countries

Do countries default in bad times? The role of alternative detrending techniques

Do countries default in bad times? The role of alternative detrending techniques

African sovereign risk premia and international market assets: A relook under the COVID-19 outbreak

Using the wavelet multiscale coherence technique, the paper examines the interdependences between global market assets, sovereign credit default swap (CDS) and yield-to-maturity on bond spread for African economies from January 2019 to March 2023. The empirical results primarily reveal a high level of coherence between global market assets and Africa's sovereign CDS and yield-to-maturity, although varying across countries and time-frequency domain. Notably, the high degree of coherence and the positive co-movement between sovereign CDS and global market assets are more concentrated at the medium and upper frequency bands. The observed intensity of co-movements between global market assets and sovereign CDS/yield-to-maturity (YTM) of bond spread, with global market assets broadly serving as leading variables, suggests that an increased global investor's risk aversion positively affects the yields on Africa market bonds. Among the global market assets, we identified that VIX (which is implied volatility of S&P500) has the dominant influence on Africa sovereign CDS/YTM compared to that emanating from Bitcoin and Godman Sachs Commodity Index. This is highly conceivable as VIX gauges bubbling global risks and uncertainties which considerably influences investor's risk aversion. The heterogeneous lead/lag dynamics also provide useful information to global investors, including by utilizing African markets to rebalance their portfolios for risk management purposes. The empirical findings thus provide further critical information to investors for hedging purposes, and to policymakers in formulating sovereign risk management policies oriented towards minimizing sovereign default risks.

A note on allowing state bankruptcy

A note on allowing state bankruptcy

The bright side of the doom loop: Banks’ sovereign exposure and default incentives

The feedback loop between sovereign and financial sector insolvency, termed the “doom loop”, was a key driver of the European debt crisis and motivated an array of policy proposals. This paper revisits the “doom loop” focusing on governments’ incentives to default. We introduce a 3-period model with strategic sovereign default, where debt is held by both domestic banks and foreign investors. The government maximizes domestic welfare; thus, the temptation to default increases with externally-held debt. Importantly, the cost of default arises endogenously from the damage that default causes to domestic banks’ balance sheets. Domestically-held debt thus serves as a commitment device for the government. We show that two prominent policy prescriptions – lower exposure of domestic banks to domestic sovereign debt or a commitment not to bailout banks – can backfire, since default incentives depend not only on the quantity of debt, but also on who holds it. Conversely, allowing domestic banks to buy additional domestic sovereign debt during times of sovereign distress can avert the doom loop. In the context of a monetary union similar unintended negative consequences may arise from a backstop by the central bank (e.g., the ECB’s Transmission Protection Instrument) if imprecisely calibrated or the pooling of debt (e.g., European safe bond, also known as ESBies).

Accounting documentation of the bankruptcy of Emperor Matthias of Habsburg in 1615: archival sources and research possibilities

ABSTRACT Based on archival research, this study presents a hypothesis that significantly changes the interpretation of the causes of the economic and political conflict in Bohemia in 1618. The results demonstrate that the deciding impulse was the uncontrollable indebtedness of the monarchy which resulted in a sovereign default (1615). The Bohemian Diet refused to guarantee the government bonds which resulted in their loss of value. Between 1615 and 1618, along with the fight for preservation of religious freedom, a strenuous fight for fiscal reform and control of economic resources was in motion. The creditors – European politicians, bankers and generals – wanted the monarch to take over Bohemia with force in order to be able to pay off the outstanding debts. The data regarding the monarchical credit crisis in Bohemia between 1615 and 1618 have not been analysed scientifically up to this point. In this study, the author presents the main documentary sources available on this issue to encourage further research and highlight the value of interdisciplinary dialogue.

Sovereign risk and intangible investment

This paper measures the output and TFP losses from sovereign risk, considering firm-level intangible investment. Using Italian firm-level data, we show that firms reallocated from intangible assets to tangible assets during the 2011–2012 Italian sovereign debt crisis. This asset reallocation is more pronounced among small firms and high-leverage firms. This reallocation affects aggregate output and TFP. To explain the reallocation pattern and quantify the output and TFP losses, we build a sovereign default model incorporating firm intangible investment. In our model, sovereign risk deteriorates bank balance sheets, disrupting banks’ ability to finance firms. Firms with greater external financing needs are more exposed to sovereign risk. Facing tightening financial constraints, firms shift their resources towards tangibles because they can be used as collateral. We find that elevated sovereign risk explains 45% of the observed output losses and 31% of the TFP losses in Italy from 2011 to 2016.

Assessing the Impact of the ECB’s Unconventional Monetary Policy on the European Stock Markets

This study assesses the effects of the European Central Bank’s (ECB) unconventional monetary policy (UMP) on the prices of selected European stock market indices during the European sovereign debt (2010–2012) and the COVID-19 pandemic (2020–2022) crises interventions. This research employs the instrumental variables (IV) two-stage least squares (2SLS) model approach to evaluate the effects of changes in the size of the ECB’s balance sheet on the pricing of key equity market indices in Europe. The results of this study suggest that the ECB’s asset value expansion had the opposite statistically significant effects on the European stock market indices’ prices between the interventions. That is, an increase in the ECB’s balance sheet size was associated with a decrease in the prices of the indices during the sovereign debt crisis and with a rise during the COVID-19 pandemic. This research pinpoints the price sensitivity of each of the European equity indices to the ECB’s UMP and determines the different outcomes of the ECB’s quantitative easing policy between the interventions.

The Real Effects of Zombie Lending in Europe

‘Zombie lending’ occurs when a lender supports an otherwise insolvent borrower. Recent studies document that zombie lending has been widespread following the European sovereign debt crisis. In this paper, I develop a quantitative model to study the impact of these lending practices on firm dynamics. In the model, firm liquidations and zombie lending arise endogenously. The model provides a good match to key euro‐area firm statistics over the period 2011–14. I find that zombie lending has a substantial impact on borrowing costs, helping more low‐productivity firms to survive. This, in turn, causes a drag on aggregate output, investment and productivity.

Financial Contagion between German and BRICS Stock Markets under Multiscale Scrutiny

We employ wavelet analysis using the maximum overlap discrete wavelet transform (MODWT) to examine the return and volatility interconnectedness between the German equity market (a prominent representative of the Eurozone market) and the BRICS countries over the period 2005–2017. Specifically, we investigate the presence of the pure form of financial contagion in the stock markets of Brazil, Russia, India, China, and South Africa subsequent to the Eurozone Sovereign Debt Crisis (EZDC). Our results indicate the presence of financial contagion between the Eurozone equity market and its counterparts in South Africa and Russia, characterised by co-movement and volatility spillover effects. This contagion is particularly evident at higher frequencies, suggesting that the transmission of shocks occurs rapidly across these markets in the short term. No financial contagion is observed in the Brazilian, Chinese, and Indian stock markets during the European Sovereign Debt Crisis. The absence of financial contagion observed in these three BRICS countries during the European Sovereign Debt Crisis suggests that policymakers in these countries should prioritise addressing idiosyncratic shock channels.

Climate defaults and financial adaptation

We analyze the relationship between climate-related disasters and sovereign debt crises using a model with capital accumulation, sovereign default, and disaster risk. We find that disaster risk and default risk together lead to slow post-disaster recovery and heightened borrowing costs. Calibrating the model to Mexico, we find that the increase in cyclone risk due to climate change leads to a welfare loss equivalent to a permanent 0.95% consumption drop. However, financial adaptation via catastrophe bonds and disaster insurance can reduce these losses by about 21%. Our study highlights the importance of financial frictions in analyzing climate change impacts.

Non-aligned common front: strategic imaginaries of the new international economic order (NIEO)

ABSTRACT Fifty years after the Sixth Special Session, the Progressive International (PI) has declared a strategy of "renovating the NIEO". However, key questions remain about the decisions that created and led the original campaign. The NIEO's draft declarations were brought to the UN General Assembly by the leaders of 95 states, caucused as the G77. Their solidarity was necessarily pluralistic, drawing on Marxist and Liberal visions of what Adom Getachew called “post-imperial worldmaking”. This raises the question of how this global "common front" was possible, and what the PI might do differently this time. As a partial explanation, I compare two of the project's strategic imaginaries, showing that they were successfully synthesised in practice. As this legacy inspires the PI's focus on the possibilities of sovereign debt crises, the NIEO continues to play an important historical role. It alludes to possible options, or alternative futures, of world order and global development.

The geography of European financial centers: 1993–2020

This paper examines the dynamics of employment in the financial sector in the European Union and the United Kingdom since the early 1990s. Using the EU Labor Force Survey at the national (NUTS0), regional (NUTS1), and subregional (NUTS2) levels, we document several stylized facts about the evolution of financial centers. Despite the global financial and sovereign debt crises, the total number of workers in the financial sector has increased from less than 5 million in 1993 to more than 6.5 million in 2020. At the same time, however, the share of employees in the financial sector has decreased from 3.5% to 2.8%. We find large regional differences in the degree of financial specialization, with Luxembourg at the top end (11% of their total workforce), followed by Ireland and the United Kingdom (4%), then France, Germany or Italy (around 3%). We also explore the dynamics of concentration. The main conclusion is that the degree of concentration depends on the scale of measurement employed. We show a contrasting concentration trend: centripetal at the national level and centrifugal at lower levels (regional or sub-regional). Furthermore, newer financial centers showed faster growth. JEL codes: E44, G2, R1

Equally poorer: inequality and the Greek debt crisis

AbstractIn this paper, we discuss the evolution of inequality in Greece from 2004 to 2021 in light of the Greek debt crisis that led to a sharp drop in gross domestic product per capita between 2008 and 2013. While aggregate measures of income inequality, such as the Gini coefficient, suggest a marginal improvement, domestic perceptions of social fairness remain bleak. To delve deeper into this paradox, we explore additional aggregate and distributional aspects of Greece's social landscape during this period. Our analysis reveals several contributing factors: a compression of earnings, benefits and pensions; a sharp increase in social exclusion; and high inequality in access to basic public services and housing. These factors go beyond what headline inequality indices indicate, illustrating how the sovereign debt crisis and subsequent austerity measures have affected individuals differently based on their socio‐economic background, while also reducing overall welfare across the Greek population. Moreover, chronic institutional inefficiencies and widening disparities in access to services and housing significantly influence perceptions of inequality and contribute negatively to the country's social cohesion.

Does the U.S. extreme indicator matter in stock markets? International evidence

We propose a new predictor—the innovation in the daily return minimum in the U.S. stock market (ΔMINUS\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$$\\Delta {MIN}^{US}$$\\end{document})—for predicting international stock market returns. Using monthly data for a wide range of 17 MSCI international stock markets during the period spanning over half a century from January 1972 to July 2022, we find that ΔMINUS\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$$\\Delta {MIN}^{US}$$\\end{document} have strong predictive power for returns in most international stock markets:ΔMINUS\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$$\\Delta {MIN}^{US}$$\\end{document} negatively predicts the next-month stock market returns. The results remain robust after controlling for a number of macroeconomic predictors and conducting subsample and panel data analyses, indicating that ΔMINUS\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$$\\Delta {MIN}^{US}$$\\end{document} has significant predictive power and it outperforms other variables in international markets. Notably, ΔMINUS\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$$\\Delta {MIN}^{US}$$\\end{document} demonstrates excellent predictive power even during the periods driven by financial upheavals (e.g., Global Financial Crisis and European Sovereign Debt Crisis). Both panel regressions and out-of-sample tests also support the robust predictive performance of ΔMINUS\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$$\\Delta {MIN}^{US}$$\\end{document}. The predictive power, however, disappears during the non-financial crisis caused by COVID-19 pandemic, which is originated from the health sector rather than the financial sector. The results provide a new perspective on U.S. extreme indicator in stock market return predictability.

International exposure and the transmission of financial shocks: Evidence from China

This study explores the impact of adverse financial shocks on Chinese firms through the bank lending channel and the firm borrowing channel. Using new data linking Chinese firms to their bank(s) and three measures of exposure to international markets, we find that banks with greater exposure to the international markets cut lending more during the financial and sovereign debt crises or when there is a negative shock to OECD GDP growth. Furthermore, state-owned bank loans are more pro-cyclical than private bank loans, and would have been even more pro-cyclical if state-owned banks had not assumed any responsibility for stimulus policies. With regard to the firm borrowing channel, we find that firms with higher weighted aggregate exposure to the international markets through banks have lower net debt, cash, employment, and capital investment during crises or when there is a negative shock to OECD GDP growth. Our results have significant implications for how global financial shocks are transmitted in a regulated financial market such as China.

Disaster scenes as a foundation for emergency response planning

This article introduces the notion of ‘disaster scenes’. In this work, we draw on interview data collected from residents impacted by the Jagersfontein tailings disaster in South Africa in September 2022. Our methodological aim is to reconstruct the experiences of impacted people in the format of empirically derived disaster scenes. These scenes provide a credible source for modelling scenarios because they showcase the prior, immediate, response and long-term recovery phases of disaster management. Studies that provide empirical detail on the lived experience of disasters confirm the heavy burden placed on impacted people largely originating from institutional decisions. The overarching empirical narrative from this case and other cognate cases is that the absence of state institutions is a factor that likely contributes to disaster events. Our argument is that sharing information that includes models of state default can empower potentially affected groups to demand safeguards and greater transparency in relation to the operation and regulation of tailings facilities.