Creditor Countries Research Articles

Odious Debts and International Fair Trade

I argue that one of the most important reasons why international trade has been unfair is that weaker parties in trading negotiations have been illegitimately forced to accept terms of trade that they would not otherwise accept under normal circumstances, and these terms of trade have been harmful for them. Odious debts are at the center of this kind of injustice. Odious debts are debts that are not binding for the citizens of a country, as they were incurred by illegitimate rulers in the name of all the citizens, but used for private purposes, such as personal benefit, or to oppress the population. Despite the fact that these debts are not binding—that is, that they should not be repaid—creditor countries have coerced debtor countries to repay them and, more importantly for the purposes of this article, they have taken advantage of the fact that countries are burdened with these debts by tailoring trade agreements in their favor. They have done so by telling debtor countries that, unless they trade under terms that creditor countries want; non-binding (i.e. odious) debts will be enforced. The resulting state of affairs is not simply a convenient one for creditor countries and an inconvenient one for debtor countries. It is also an immoral one.

What Do Deviations from Covered Interest Parity and Higher FX Hedging Costs Mean for Asia

Asian countries have high demand for U.S. dollars and are sensitive to U.S. dollar funding costs. An important, but often overlooked, component of these costs is the basis spread in the cross-currency swap market that emerges when there are deviations from covered interest parity (CIP). CIP deviations mean that investors need to pay a premium to borrow U.S. dollars or other currencies on a hedged basis via cross-currency swap markets. These deviations can be explained by regulatory changes since the global financial crisis, which have limited arbitrage opportunities and country-specific factors that contribute to a mismatch in the demand and supply of U.S. dollars. We find that an increase in the basis spread tightens financial conditions in net debtor countries, while easing financial conditions in net creditor countries. The main reason is that net debtor countries are, in general, unable to substitute smoothly to other domestic funding channels. Policies that promote reliable alternative funding sources, such as long-term corporate bond market or stable long-term investors, including a “hedging counterpart of last resort,” can help stabilize financial intermediation when U.S. dollar funding markets come under stress.

Debt Overhang and Monetary Policy in Czech Republic

We investigate the consequences of excessive international debt overhang as they relate to both debtor and creditor countries. In particular, we assess the impact of monetary policy on financial stability and how it can be used to smooth borrowers, as well as creditors, consumption over the business cycle. Based on [Goodhart, Peiris, Tsomocos, 2018], we establish that an independent countercyclical monetary policy, that contracts liquidity whenever debt grows whereas it expands it when default rises, reduces volatility of consumption. In effect, monetary policy provides an extra degree of freedom to the policymaker. We implement our approach to the Czech and Eurozone area economies during the 1990s.In our model, we introduce endogenous default ά la [Shubik, Wilson, 1977], whereby debtors incur a welfare cost in renegotiating their contractual debt obligations that is commensurate to the level of default. However, this cost depends explicitly on the business cycle and it should be countercyclical. Hence, contractionary monetary policy reduces the volume of trade and efficiency, thus increasing default. This occurs as the default cost increases the associated default accelerator channel engenders higher default rates. On the other hand, lower interest rates increase trade efficiency and, consequently, reduce the amplitude of the business cycle and benefit financial stability.In sum, the appropriate design of monetary policy complements financial stability policy. The modelling of endogenous default allows us to study the interaction of monetary and macroprudential policy.

Net foreign asset positions and appreciation expectations on the Swiss franc and the Japanese Yen

The paper shows that currencies of countries with persistent current account surpluses and high foreign-currency denominated assets, such as the Swiss franc and the Japanese yen, are under persistent appreciation pressure, particularly when the centres of the world monetary system follow expansionary monetary policies. This limits the choice of exchange rate regime. Given flexible exchange rates, a negative risk premium on the domestic interest rate can emerge. Empirical estimations provide mixed evidence for a negative impact of net foreign asset positions and exchange rate uncertainty on interest rates of international creditor countries at the periphery of the world monetary system.

Global Imbalances from a Stock Perspective

After the recent crisis, a reduction was observed in global current account (“flow”) imbalances. Even so, global disequilibria as measured in terms of countries’ net foreign assets (“stock imbalances”) kept increasing. This paper discusses whether stock imbalances have a stabilising or destabilising impact on countries’ accumulation of external wealth. That is, do creditor economies, by virtue of their positive stock of net foreign assets, keep accumulating — everything else equal — external wealth? Do debtor countries, due to their negative net foreign assets position, keep accumulating external debt? Our results show that in debtor economies the existing stock of net debt helps to limit current account deficits, thus halting future debt accumulation. In creditor countries, however, the positive stock of net foreign assets contributes — everything else equal — to increase future current account surpluses, potentially leading to destabilising dynamics in wealth accumulation. This asymmetry between creditors and debtors holds in spite of the stabilising impact that net foreign assets have on the trade balance of creditor countries through real exchange rate fluctuations, and might have major implications for global trade and growth.

Falling off the Tourism Ladder

Before the economic crisis of 2008, Spain's tourism economy was held up as a global model of how to ascend the virtuous tourism “ladder” from budget beachfront package tours to more profitable cultural tourism that emphasizes art museums, cuisine, and heritage. This article examines how the maturation of the tourism industry in Spain became a symbol of democratization and European integration in the 1980s and 1990s. The piece then considers how the 2008 crisis challenged public confidence in the tourism economy due to the scale of the real estate crash, revelations of corruption and misappropriation of public funds, and crushing regional debt. Finally, it shows how the new political geography of Europe is divided between creditor countries, from the European core, that visit and debtor countries, in the Mediterranean, that are visited.

Voting Behaviour in the European Parliament and Economic Governance Reform: Does Nationality Matter?

This paper analyses MEPs’ voting behaviour on all regulations and directives forming the Six-Pack and the Two-Pack together with the key vote required to establish the European Stability Mechanism (ESM). Whereas scholarly work has traditionally showed MEPs voting behaviour to be primarily driven by ideology (more specifically, by the MEP’s party group affiliation), we expect to find MEPs’ national origins to play a counterbalancing role and – at least partially – weaken intra-party position on key economic governance matters, where a conflict of interest might exist between creditor and debtor member countries. Findings confirm that national interests and country-level economic variables can predict MEPs’ votes in a considerable number of cases, opening new avenues for future research on territorial cleavages in the European Parliament.

Crisis of trust: Socio-economic determinants of Europeans’ confidence in government

Europeans’ confidence in political institutions has dropped precipitously since the onset of the Euro-crisis in 2009. The decline in trust in government varies across countries and occupational and educational groups. Economic factors explain much of the cross-national and over-time variation. The baseline level of trust is influenced by a person’s position in the labor market: across European countries, citizens with more education and higher levels of skills trust government more than those educational and occupational groups that have benefited less from European integration. Residents of debtor countries with high unemployment rates are also much less likely to trust national government than those in creditor countries that have fared better during the economic crisis, while the unemployed have lost faith in government to a greater degree than other parts of the population. Cultural, ideational, and political factors remain important for baseline levels of trust, but cannot explain the acute, asymmetr...

Explaining trade imbalances in the euro area: Liquidity preference and the role of finance

Extant literature nearly exclusively explains the current account imbalances in the euro area by blaming wage policy. Mainstream economics considers wage policy as responsible for both trade imbalances and the split between debtor and creditor countries. In contrast, this article argues that cross-border capital flows come first, and affect aggregate demand and production costs. Trade flows and the real exchange rate adjust to financial flows. The rationale of this reversed argument is Keynes’ liquidity theory of interest. The policy implications drawn from the argument point in the direction of more capital controls rather than controls on wage formation. JEL Classification: E12; E43; F36

From a Deficit of Democracy to a Technocratic Order: The Postcrisis Debate on Europe

The political problems of democratic legitimacy related to the construction of the European Union have mutated deeply during the crisis. The survival of the Eurozone has exacted a high toll on democratic principles. National representative democracy has been weakened due to the imperatives of economic integration. The technocratic elements of European integration (independent agencies, binding rules on economic matters) have expanded dramatically in scope. In the past, the technocratic dimension was circumscribed to efficiency-enhancing policies; during the crisis, it has been extended to issues with clear distributional consequences (such as the burden of adjustment between debtor and creditor countries). The resulting paradox is that in a time of growing “politicization” of European affairs, the technocratic bias of the European Union has “depoliticized” economic issues. This article reviews the recent debates about the tension between technocracy and democracy in the context of European supranational integration.

Understanding the Political Economy of the Eurozone Crisis

The Eurozone crisis constitutes a grave challenge to European integration. This article presents an overview of the causes of the crisis and analyzes why it has been so difficult to resolve. We focus on how responses to the crisis were shaped by distributive conflicts both among and within countries. On the international level, debtor and creditor countries have fought over the distribution of responsibility for the accumulated debt; countries with current account surpluses and deficits have fought over who should implement the policies necessary to reduce the current account imbalances. Within countries, interest groups have fought to shift the costs of crisis resolution away from themselves. The article emphasizes that the Eurozone crisis shares many features of previous debt and balance-of-payments crises. However, the Eurozone's predicament is unique because it is set within a monetary union that strongly constrains the policy options available to policy makers and vastly increases the interdependence of the euro crisis countries. The outcome of the crisis has also been highly unusual because the costs of crisis resolution have been borne almost exclusively by the debtor countries and taxpayers in the Eurozone.

Does Greece Need More Official Debt Relief? If So, How Much?

Creditor countries and international organizations continue to disagree whether Greece should receive additional official debt relief, and if so how much. This paper first shows that these disagreements can be attributed to competing assumptions about Greece’s future capacity to repay, particularly about economic growth and the fiscal primary balance. It next evaluates the plausibility of alternative primary balance assumptions using international evidence about fiscal adjustment experiences. It concludes that primary balance paths required to make Greece’s debt sustainable are not plausible and that Greece will therefore require additional debt relief. Finally, the paper shows that the debt relief measures suggested by the Eurogroup in May 2016 (albeit with significant caveats on whether they will in fact be granted or not) could be sufficient to address Greece’s sustainability problem, provided the Eurogroup is prepared to accept both very long maturity extensions on European Financial Stability Facility (EFSF) debt (to 2080 and beyond) and interest deferrals that could lead to a large rise in EFSF exposure to Greece before it begins to decline. If the Eurogroup wishes to avoid the latter, it will become necessary to either (1) extend the scope of the debt restructuring, (2) lower the interest rates charged by the EFSF significantly below current predictions, or (3) extend European Stability Mechanism (ESM) financing beyond 2018 and delay Greece’s return to capital markets for a protracted period.

The terms of trade, the external balance, and the size of the net foreign asset position

In this paper, we study the extent to which the enormous increase of cross-border holdings of capital impacts the manner in which the terms of trade affect a country's external balance. We find that the impact of a shock in the terms of trade on the external balance depends on whether the traditional rule or the new view for the current account dominates. If the new view for the current account holds, the Harberger-Laursen-Metzler effect holds for creditor countries: a deterioration of the terms of trade deteriorates the external balance. However, if the traditional rule dominates, changes in the terms of trade may not affect the external balance, and the effect fails to hold. The empirical evidence, based on a sample of 37 countries from 1970 to 2009, shows that when the ratio of the net foreign asset position is approximately between −15% and +15% as a share of domestic wealth, the new view dominates and the effect holds for creditor countries; however, in large creditor or debtor countries, the traditional rule dominates, and the effect ceases to hold.

The financial benefits of the IMF

The IMF provides loans to countries in financial distress at a relatively low interest rate. In this article we calculate how much the seven largest debtors to the IMF have saved on interest payments during the Asian crisis and its aftermath. We explain how the IMF can charge these low interest rates and at what cost for creditor countries. The conditionality attached to the use of IMF resources in the form of policy measures reduces moral hazard behaviour; we argue that this is a better instrument than raising interest rates on IMF loans. JEL Codes: F34, F32, F33, O16

Debt Relief and Good Governance: New Evidence

Since the introduction of the HIPC Initiative in the early 2000s, indebted LICs had to show a decent governance performance before their debts were forgiven. We discuss the hypothesis that during the follow-up, Multilateral Debt Relief Initiative (MDRI), the World Bank has refrained from this policy, and that debt relief decisions are rather politically driven. We test different political economy theories by applying panel models to a set of debtor and creditor countries, respectively. Our main finding shows, that improvements in governance quality led to higher levels of debt forgiveness in 2000-2004, but not in the subsequent periods.

Crisis of Trust: Socio-Economic Determinants of Europeans' Confidence in Government

Europeans’ confidence in political institutions has dropped precipitously since the onset of the Euro-crisis in 2010. However, the decline in public trust in government varies tremendously across countries and occupational and educational groups. Analyzing more than 600,000 responses from 23 waves of the Eurobarometer conducted from 2004-2015, we find that economic factors explain much of the cross-national and over-time variation. The baseline level of trust is influenced greatly by a person’s position in the labor market: across European countries, citizens with more education and higher levels of skills express more trust in government than those educational and occupational groups that have benefited less from European integration. The acute decline in the level of public trust in the past decade also has strong economic foundations. Residents of debtor countries that have seen unemployment rates skyrocket in recent years are now much less likely to trust national government than those in creditor countries that have fared better during the economic crisis, while the unemployed have lost faith in government to a greater degree than other parts of the population. Cultural, ideational, and political factors remain important for baseline levels of trust, but on their own they cannot explain the acute, asymmetrical decline in citizen trust observed over the last decade.

Gaining Votes in Europe against Europe? How National Contexts Shaped the Results of Eurosceptic Parties in the 2014 European Parliament Elections

In the wake of the harshest economic crisis since 1929, in several European countries there has been a rise of Eurosceptic parties that oppose EU integration. The 2014 European Parliament elections were a fundamental turning point for these parties. In this article, after a theoretical discussion on the concept of Euroscepticism, we provide an updated classification of Eurosceptic parties after the 2014 European Parliament elections. We show the cross-country variability of such parties’ results and present two hypotheses aiming at explaining Eurosceptic parties’ results, one related to each country’s economic context and one related to each country’s political-institutional context. Through a comparative approach and the use of quantitative data, we test the two hypotheses by creating two standardised indices of economic and political-institutional contexts. Three important findings are shown: Eurosceptic parties perform better in either rich, creditor countries or in poor countries; Eurosceptic parties perform better in countries with peculiar political-institutional features, such as high levels of party system instability and a more permissive electoral system; finally, and crucially, favourable political-institutional contexts seem to be more important than favourable economic contexts for Eurosceptic parties’ electoral results

The IMF as just One Creditor: Who’s in Charge When a Country Can’t Pay?

ABSTRACTThe international community’s management of the 2010 financial crisis in Greece revealed a major gap in the international financial system. No single institution is any longer unambiguously in charge. Consequently, the path is open for narrow interests to predominate over global interests. An examination of postwar history shows that this problem has been growing gradually since the 1970s and has become much greater since the mid-1990s. To alleviate the problem, the International Monetary Fund needs to develop an effective strategy for reducing the opportunities for creditor countries to intervene in decisions on how crises should be resolved.

Worldwide impact of IMF policies during the Asian crisis: who does the IMF help, creditors or crisis countries?

This paper examines the effects of International Monetary Fund (IMF) policy announcements on financial markets worldwide. We investigate reactions from stock, bond, foreign exchange and futures markets and banking and financial companies during the Asian crisis. We explore the impact of IMF bailouts not only on crisis countries, but also on main creditor countries. We study the impact of local governments’ and public responses in crisis countries to account for interaction between the IMF and local parties. We show IMF involvement and local governments’ co-operation actually helps crisis countries but not creditors. We show that in crisis countries, financial markets generally react unfavourably to their governments’ initial demands for IMF assistance, while compliance of the crisis countries with the IMF policy action is commonly perceived as good news. Financial markets in crisis countries react negatively to prolonged negotiations and government actions against IMF policy. Creditor countries’ financial markets are not responsive to IMF actions in crisis countries. We discuss policy implications of findings.

Saving the Euro: Mitigating Financial or Trade Spillovers?

This paper analyzes through what channels the euro crisis affected firms and the efficacy of policies to mitigate the crisis. It analyzes stock price responses for 3,045 nonfinancial firms in 16 countries to four key policy events during 2010–11. Using precrisis benchmarks, it separates financial effects from trade effects and examines how bank and trade linkages propagated shocks. It finds that policy measures affected financially dependent firms more, particularly in creditor countries with greater bank exposure to peripheral euro countries, in statistically and economically significant ways. Trade linkages with peripheral countries played little role, although euro movements meant some differential effects.