Debt Crisis Research Articles

Climate change and external debt vulnerability: the case of Sub-Saharan Africa

This study examined the influence of climate change vulnerability on the external debt vulnerability of Sub-Saharan Africa, with a focus on the Vulnerable Twenties (V20s), utilizing panel data spanning from 2015 to 2020. The climate readiness, climate vulnerability, and external debt vulnerability indices were derived via principal component analysis (PCA). The results from the system GMM analysis indicate that climate readiness exhibits a negative and significant impact across short- and long-term periods for the overall sample. However, for the V20s, the negative effect of climate readiness shifts to a positive and significant one over both short and long terms, with the long-term effect being more notable. These findings highlight a vicious cycle between debt and climate crises within the V20s. Thus, prioritizing debt relief over climate finance loans, decarbonizing greenhouse gas emissions, redirecting funds for climate goals, improving debt practices, and investing in public services would break nations’ vicious cycle of debt and climate vulnerability.

Latin American networking and cooperative struggles in Argentina: A conversation with the Movimiento de Ocupantes e Inquilinos (MOI)

This conversation examines the Movimiento de Ocupantes e Inquilinos (MOI) in Argentina, a grassroots organization promoting cooperative, self-managed housing for over 30 years. Based on a conversation with Néstor Jeifetz, the article traces the origins of the MOI from the 1980s building occupations in Buenos Aires, through its connection to the broader Latin American cooperative housing movement, including the creation of the Latin American Secretariat for Popular Housing and Habitat (SELVIHP). The article explores how MOI’s efforts to reclaim vacant urban properties—such as the La Fábrica cooperative housing project—address the critical need for secure, affordable housing in a context of neoliberal economic policies and external debt crises. Jeifetz discusses the political ramifications of recent far-right victories in Argentina, which threaten hard-won social rights and self-managed housing initiatives, as well as the MOI’s role in resisting these policies through a framework of collective ownership, democratic decision-making, and mutual aid. By highlighting the intersections of housing with education, health, and labor, and situating the MOI’s work within a larger history of land and building occupations across Abya-Yala, this article provides a nuanced understanding of the ongoing struggles for housing justice in the face of both local and global neoliberal forces.

Impact of Economic Crises on Banking Sector Performance- A Comparative Analysis of Conventional and Islamic Banks Across OIC Countries

This study investigates the impact of three significant economic crises—the Eurozone Debt Crisis (2010-2012), the COVID-19 Pandemic (2020-2021), and the Post-Pandemic Economic Recovery (2021-2022)—on the performance of conventional and Islamic banks in Organization of Islamic Cooperation (OIC) countries. Using a dataset of 4,381 observations from 34 OIC countries, panel regression techniques are employed to evaluate the influence of these crises on key financial performance metrics: Return on Shareholders' Funds (ROSF), Profit Margin (PM), Return on Total Assets (ROA), Current Ratio (CR), and Solvency Ratio (SR). The analysis reveals that while the Eurozone Debt Crisis did not significantly affect bank performance, the COVID-19 pandemic led to a notable decline in profitability but an improvement in liquidity. The results highlight that during the COVID-19 pandemic, banks faced substantial challenges in maintaining profitability, as evidenced by the significant decrease in PM. However, the improvement in CR suggests that banks enhanced their liquidity management strategies to cope with the crisis. The Post-Pandemic Economic Recovery phase brought positive changes in both profitability and liquidity, demonstrating the ability of banks to adapt and thrive as economic conditions stabilized. Macroeconomic variables, such as GDP growth and inflation, played crucial roles, with GDP growth positively affecting ROSF and inflation negatively impacting PM. These findings underscore the importance of a diversified banking system, including both conventional and Islamic banks, to enhance financial stability. Policymakers and financial regulators should consider the unique strengths of Islamic banking principles in regulatory frameworks and prioritize sound macroeconomic policies to promote stability and resilience in the banking sector. Future research should further explore the long-term impacts of economic crises on bank performance across different regions and banking models, as well as the interaction between regulatory environments and bank resilience. Keywords: Economic crises, bank performance, conventional banks, Islamic banks, OIC countries, COVID-19 pandemic, Eurozone Debt Crisis, post-pandemic recovery, financial stability, macroeconomic factors.

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).

Connectedness and Shock Propagation in South African Equity Sectors during Extreme Market Conditions

This study examined the connectedness and propagation of risk in the South African equity sectors during the Global Financial Crisis (GFC), the European Debt Crisis (EDC), the US–China trade war, and the COVID-19 pandemic. Daily returns of nine Johannesburg Stock Exchange (JSE) super sectors were examined from 3 January 2006 to 31 December 2021. Applying the connectedness matrix and time-varying parameter vector autoregressive (TVP-VAR) model, in full sample and sub-periods, the study showed that dynamic total connectedness of the super sectors is high in absolute form (62%). Furthermore, it was found that the highest volatility connectedness was during the EDC (68.83%) and during the COVID-19 pandemic (68.57%), followed by the GFC (63.16%) and lastly the US–China trade war (42.09%), respectively. This suggests that the tendency for a systemic risk is highest during the EDC, COVID-19, and GFC periods, and lowest during the US–China trade war. The financial sector was the primary net-transmitter of shocks during the COVID-19 period, while the automobile and parts sector was the strongest net-transmitter of shocks during the GFC, EDC, and US–China trade war. Similarly, the strongest net recipient of shocks during GFC, EDC, and COVID-19 is the chemical super sector. The study concludes that there is a significant volatility connectedness among JSE super sectors. In addition, the JSE super sectors exhibit time-varying connectedness during extreme events. Moreover, the net-transmitter and net-receiver of shock do not change significantly during different crisis periods. The policy implications of the findings are highlighted in the concluding section.

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.

Analysis of financial contagion among economic sectors through Dynamic Bayesian Networks

Crises severely impact economies and may spread across regions or sectors in a process called contagion. Understanding this process is crucial for anticipating crises’ effects and implementing mitigative strategies. Specific economic sectors may be major crisis propagators: banking and insurance are often considered decisive in this context. This study employs Dynamic Bayesian Networks to model sectoral interdependencies within the U.S. economy, utilizing daily data from nine Dow Jones industrial indices over the period 2000–2020. As a secondary objective, we evaluate whether the insurance industry plays a central role in spreading crises. Several crisis periods are analyzed, from dot-com bubble to Covid-19 pandemic. The results reveal the subprime crisis, European debt crisis and the 2016 presidential election as the main contagious periods. The last analyzed period – Covid-19 pandemic – was divided in two phases, showing, on phase 1, an interconnected economic system with three main spreaders (Oil & Gas, Real Estate and Pharmaceutical) and, on phase 2, the same configuration of the post-subprime. Furthermore, although the insurance sector was somehow relevant during subprime crisis, it primarily acts as a contagion receptor, specially from the banking sector, with the correlation between them being the highest of all, reaching 0.49 at the last period.

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.

La vita privata del nobile romano Lorenzo de Cinque (1552–1618)

This profile of Lorenzo de Cinque’s private life in Rome at the end of the sixteenth century is derived from reminiscences in his Libro di Memorie, recently transcribed and published. It depicts the uneasy transformation from the moral freedom of pagan Rome to the formally virtuous life advocated by the Church of Rome after the Council of Trent (1545–1563), and also the practical consequences of the debt crisis which afflicted Rome at the end of the century.

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

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.

Equally poorer: inequality and the Greek debt crisis

Equally poorer: inequality and the Greek debt crisis

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.

DYNAMIC VOLATILITY SPILLOVERS BETWEEN CURRENCIES OF ASEAN MEMBER COUNTRIES AND CHINA: EVIDENCE FROM TVP-VAR APPROACH

Driven by the importance of analyzing interregional volatility spillover effects, this study investigates dynamic volatility spillovers between the currencies of China– ASEAN Free Trade Area (FTA) member countries by applying the time-varying parameter vector autoregressive (TVP-VAR) connectedness approach to a sample spanning January 1, 2006, to October 31, 2022. The results show that (1) dynamic volatility connectedness varies over time and reaches peaks due to economic events, such as the 2008 global financial crisis (GFC) and the COVID-19 pandemic; (2) the Chinese yuan (CNY) market assumes more of a net receiving role for volatility spillovers after the 811 exchange rate reform, while the Singapore dollar (SGD) market assumes more of a net transmitting role for volatility spillovers in the whole sample period and (3) negative spillovers are dominant during the study period, except during the European debt crisis. Our findings can help China and ASEAN establish an exchange rate coordination mechanism to prevent the cross-country transmission of exchange rate risk.

Public Debt Economic Growth Nexus: How Effective to Allay Resetting Economic Growth of India

There are two primary schools of thought in contemporary debates on the causes of India's debt crisis: those linked to changes in the world economy and those connected to errors in domestic policy. Because of the instability of the world economy, developing countries like India are forced to borrow money from national and international institutions to make up the difference in their spending. For these capital-poor economies to improve their capital stock and stable levels of per capita output, borrowing is considered essential. According to conventional economic theory, public debt can temporarily increase economic development by promoting aggregate demand. Nonetheless, the majority of empirical research conducted in many nations shows that public debt and long-term economic growth are negatively correlated. Theoretically, it is still unclear how much public debt has contributed to India's economic expansion. The purpose of this study was to investigate how public debt affected India's economic growth from 1991 and 2022. The study looked at the connection between India's economic expansion and public debt. The report suggests that borrowed money be used to diversify the productive capacities of the economy and advises cautious management of governmental debts. This would produce sufficient resources to settle the obligations without having a negative impact on the economy.

From Debt to Sustainability: Advancing Wastewater Projects in Developing Countries through Innovative Financing Mechanisms—The Role of Debt-for-Climate Swaps

Developing countries, including Small Island Developing States (SIDSs) and Least Developed Countries (LDCs), are exceptionally vulnerable to climate change due to their distinct geographical and environmental characteristics. Escalating sea levels and heightened salinity levels imperil freshwater reserves, while warmer ocean temperatures and acidification disrupt water demand, tourism, health services, and fisheries. Concurrently, these countries bear the brunt of water shortages, flooding, and declining water quality. However, significant barriers such as limited financing capacities to fund water security initiatives, exacerbated by a growing debt crisis marked by escalating interest rates and inflation, hinder developmental progress and investments in climate adaptation and mitigation endeavors. Consequently, there arises a critical necessity to harness innovative financial mechanisms to transform these debts into opportunities that support effective climate action. This paper explores the potential of debt-for-climate swaps as a catalyst for advancing transformative wastewater projects, focusing on their strategic deployment to underpin critical initiatives. Through case studies and empirical evidence, the paper elucidates how debt-for-climate swaps can enhance sustainable wastewater management systems in developing countries and delineates best practices for leveraging these mechanisms and the roles and responsibilities of key stakeholders, including governments, policymakers, the private sector, communities, and climate financial institutions. Combining theoretical insights with tangible examples, this paper furnishes a comprehensive framework for harnessing debt-for-climate swaps to enhance water security and resilience in developing countries. It offers actionable strategies for policymakers, practitioners, and stakeholders to navigate the complex terrain of climate change and engender sustainable development.