Debt Crisis Research Articles

Changing international hegemony and dependency in peripheral countries: A case study of Latin America

The literature on demand-driven growth models, while an important contribution to comparative political economy, places too much emphasis on developed countries and too little on the international political economic context. To extend these models to the periphery, where international influence is especially important, it is suggested that theories of hegemony and dependency be incorporated into the analysis. The main argument is that international relationships can limit the ability of peripheral countries to produce more sophisticated goods and attain high-income status. The nature of the limits varies with the needs of the hegemon (or rising hegemon), which are met via three dependency mechanisms: markets, leverage, and linkage. The proposed approach is illustrated by a study of Latin America from 1990 to 2020. After following a consumption-led model from the end of WWII until the debt crisis of the 1980s, a new export-led model was introduced in the 1990s, with different variants in the northern and southern parts of the hemisphere and different “winners” and “losers.” In the 1990s, US dominance favored Mexico through its incorporation into US industrial value chains, while China’s entrance into the region after 2000 privileged South America’s commodity producers. The trade and financial advantages afforded the two subregions by the respective powers were offset by negative aspects of the dependent relationships. Mexico’s sophisticated industries financed by US FDI benefited only certain enclaves in the country, while South America suffered reprimarization and deindustrialization through its new links with China.

Tracing the dynamic impact of energy transitions on equity market volatility in an era of financial turbulence

This study investigates the dynamic relationship between the shift towards clean energy and stock market fluctuations, covering the period from January 2004 to August 2021 by applying time-varying parameters vector autoregressions (TVP-VAR). The results reported strong spillovers between clean energy markets and stocks, while dirty ones demonstrated disconnected spillovers. Asymmetry in the spillovers detected dominance of negative (bad) spillovers due to various uncertain economic and financial circumstances. The most significant negative (bad) events tracked in time-varying attributes are the global financial crisis, European Debt Crisis, Shale Oil Crisis, Brexit, US interest rate agenda, and the COVID-19 pandemic. Meanwhile, negative asymmetries prevailed in time-varying analysis, echoing the pre-eminence of negative crisis periods. We identified clean energy markets and stocks as net spillover emitters and dirty energy markets as net recipients. These findings have profound implications for a range of stakeholders, including investors, policymakers, and market participants, offering valuable insights for portfolio diversification and risk management strategies amidst the ongoing energy paradigm shift.

Banking regulation with risk of sovereign default

Banking regulation routinely designates domestic government debt as safe, even when this debt is risky. We show, in a parsimonious model, that this failure to recognize the riskiness of government debt induces domestic banks to “gamble” with depositors’ funds by purchasing risky government bonds and assets correlated with them. Sovereign defaults then result in banking crises; however, by permitting banks to gamble, the regulator lowers the government’s borrowing costs ex-ante. Thus, the government has an incentive to ignore the riskiness of the sovereign bonds. We derive a set of testable implications and present supporting empirical evidence from sovereign debt crises in Russia, Argentina, and the Eurozone.

The tail connectedness among conventional, religious, and sustainable investments: An empirical evidence from neural network quantile regression approach

AbstractFinancial markets are highly unpredictable and often associated with tail risks. This study examines the tail connectivity among three distinct markets—conventional, religious, and sustainable—and uses a new neural network quantile regression technique to quantify their risk exposure. The findings suggest that traditional and religious investments have the greatest tail risk exposure during crises, emphasising the importance of diversification using sustainable investments. The Systematic Network Risk Index identifies intense events, such as the COVID‐19 pandemic, the European debt crisis, and the global financial crisis, as having the greatest tail risk. The Systematic Fragility Index finds the Islamic stocks during the COVID‐19 crisis and the conventional stock market before the pandemic to the highly vulnerable markets. On the other hand, the Systemic Hazard Index identifies Islamic stocks as the primary source of systemic risk. The study concludes by providing implications for decision‐makers, regulatory authorities, investors, players in the financial system, and investment managers to diversify their risk by utilising green/sustainable investments.

From wars to waves: geopolitical risks and environmental investment behaviour

ABSTRACT This study investigates the impact of geopolitical risk (GPR) on sustainable investments, focusing on five global environmental indices and two global GPR indices. Using Corrected Dynamic Conditional Correlation Generalised Autoregressive Conditional Heteroskedasticity (cDCC-GARCH) model and Diebold and Yilmaz’s spillover analysis, we use daily data from January 2009 to October 2022, covering various market phases, including the European sovereign debt crisis, the COVID-19 pandemic, and the war in Ukraine. Results from the cDCC-GARCH model reveal high dynamic conditional correlations. During periods of high volatility, environmental indices displayed simultaneous and more intense responses, limiting investment diversification alternatives when considering only the environmental side. Diebold and Yilmaz’s static analysis demonstrates that environmental segments are more influenced by systemic shocks than specific causes, with GPR’s influence proving relatively weak. In the dynamic analysis, the spillover effects of GPR in environmental segments intensified during the pandemic crisis and the invasion of Ukraine, affecting market conditions.

Bidirectional Risk Spillovers between Chinese and Asian Stock Markets: A Dynamic Copula-EVT-CoVaR Approach

This study aims to investigate bidirectional risk spillovers between the Chinese and other Asian stock markets. To achieve this, we construct a dynamic Copula-EVT-CoVaR model based on 11 Asian stock indexes from 1 January 2007 to 31 December 2021. The findings show that, firstly, synchronicity exists between the Chinese stock market and other Asian stock markets, creating conditions for risk contagion. Secondly, the Chinese stock market exhibits a strong risk spillover to other Asian stock markets with time-varying and heterogeneous characteristics. Additionally, the risk spillover displays an asymmetry, indicating that the intensity of risk spillover from other Asian stock markets to the Chinese is weaker than that from the Chinese to other Asian stock markets. Finally, the Chinese stock market generated significant extreme risk spillovers to other Asian stock markets during the 2007–2009 global financial crisis, the European debt crisis, the 2015–2016 Chinese stock market crash, and the China–US trade war. However, during the COVID-19 pandemic, the risk spillover intensity of the Chinese stock market was weaker, and it acted as the recipient of risk from other Asian stock markets. The originality of this study is reflected in proposing a novel dynamic copula-EVT-CoVaR model and incorporating multiple crises into an analytical framework to examine bidirectional risk spillover effects. These findings can help Asian countries (regions) adopt effective supervision to deal with cross-border risk spillovers and assist Asian stock market investors in optimizing portfolio strategies.

China, international competition and the stalemate in sovereign debt restructuring: beyond geopolitics

Abstract Until recently, developing countries were supposedly enjoying an unprecedented ‘age of choice’ when borrowing. Many observers were arguing then that geopolitical competition between lenders allowed them to extract better terms. Today, many face a looming debt crisis: financing options have shrivelled and restructuring talks are painfully slow, compounding debtors' misery. This is frequently attributed to creditors' geopolitical rivalry, reflecting China's rise as a sovereign lender. But why should competition between providers, once supposedly a boon for borrowers, now be a bane? This article explains this, by switching an inadequate geopolitics lens for a political economy analysis. The earlier expansion in lending was primarily driven not by geopolitical contestation but by prevailing politico-economic conditions within China and on international financial markets amid US-led quantitative easing, and was, furthermore, facilitated by China's fragmented internal governance. As economic conditions changed, financing dried up and creditors scrambled to secure returns. China's current chief competitors are not western states, but rival lenders: commercial bondholders and multilateral development banks. Given China's fragmented governance, lenders' commercial motives to recoup their loans primarily drive Chinese behaviour, not geopolitical objectives. This limits China's hegemonic potential and suggests developing countries may benefit less from the ‘second Cold War’ than some imagine.

Greece’s Debt Crisis (2008-2019): An Analysis

The Greek crisis began in November 2009, triggered by the turmoil of the global Great Recession, structural weaknesses in the Greek economy, and a lack of monetary policy flexibility as a member of the Eurozone. Since that time, Greece's economy has started to deteriorate due to a growing debt load and an unmanageable deficit are having an impact on national security. Thus, this study examined the impact of the debt crisis on Greece’s national security by using secondary data from 2009 to 2018.This study has three objectives, namely examining (1) the factor that contributed to Greece’s debt crisis; (2) the impacts of Greece’s debt crisis on its security; and (3) the Greece's approach to overcome its debt crisis. By using a qualitative approach, secondary data from scientific material such as thesis, journal papers and online data were collected. The findings revealed (1) there are four factors that led to the debt crisis in Greece such as political, government expenditure and revenue, social and EU enforcement regulations; (2) other countries, including the US and the Eurozone, as well as Greece itself, have been impacted by the crisis' repercussions on social, economic, political, and security aspects; and (3) Greece had to go through a series of restructuring to be free of this debt crisis. This study concludes, due to poor administration, Greece's debt crisis has a negative impact on security, the economy, politics, and society. Even though there were numerous foreign interventions in the crisis, it didn't just affect Greece; it also impacted other countries like EU members and the US.

When it rains, it pours: Mexico's bank nationalisation and the debt crisis of 1982

AbstractHow are expropriations related to governments' debt defaults? The literature has shown that expropriation episodes and debt defaults have rarely coincided, suggesting that each event resulted from a different set of factors. The aim of this article is twofold. First, I analyse default–expropriation relationships in the years previous to the debt crisis of 1982. I show that while default and expropriation episodes did not always coincide, countries that expropriated at least once during the period were also those that defaulted more often. I observe that countries that expropriated had worse macroeconomic indicators than countries that did not. Second, I focus on the case of Mexico, when its announcement of a debt moratorium in August 1982 was followed, less than one month later, by the nationalisation of its banking system. Both events were outcomes of an acute economic crisis. The nationalisation announcement aggravated the crisis because an agreement with the International Monetary Fund (IMF) seemed increasingly uncertain. I provide evidence from the largely overlooked bond market (on which the government never defaulted) that shows that investors reacted negatively to the bank nationalisation. Finally, I present original, published and unpublished primary sources to demonstrate that commercial banks, as well as international organisations, expressed misgivings about the banks' nationalisation. This fact may have hindered the country's economic recovery through the deterioration of public confidence and a decline in foreign investment.

“Whatever It Takes!” How tonality of TV-news affected government bond yield spreads during the European debt crisis

Were government bond risk premia affected by the media in addition to the effects of major events? Revisiting the European debt crisis, we analyze the role of television news in the rise and re-convergence of GIIPS bond spreads vis-à-vis Germany from 2007 to 2016. We use a dataset of more than one million human-coded news items from leading newscasts worldwide to identify over 25,000 news on the Eurozone and country-specific economic topics. Our findings emphasize the relevance of the tonality of news, such that an increasing share of positive (negative) news correlates with a decrease (increase) in spreads. Content-based endogenous clustering of news highlights the importance of news about institutions providing stability and “international financial support” to distressed countries in reducing bond spreads. Moreover, weekend news enables us to establish a causal link between country-specific news coverage and changes in spreads on the subsequent trading day.

Economic Crises in Recent World History: Analysis of Causes and Assessment of Consequences

The study «Economic Crises in History: Analysis and Consequences» provides a comprehensive overview of significant economic crises spanning different periods and regions of world history. The work extensively examines the following events: the Great Depression (1929–1933), the Asian Financial Crisis (1997), the Financial Crisis of 2008, the Eurozone Debt Crisis (2010–2012), the Crisis in Russia (1998), and the Oil Crisis of the 1970s.Each crisis is analyzed in terms of its causes, characteristics, impact on the economy and society, as well as measures taken to overcome its consequences. The study emphasizes the role of crises in correcting imbalances, stimulating innovations, and restructuring industries. Specific figures, such as unemployment rates, GDP contractions, changes in financial markets, and other economic indicators, are discussed within the context of each crisis.In the conclusion of the study, it is underscored that despite their complexity and negative consequences, crises can serve as catalysts for change, fostering structural reforms, improving efficiency, and contributing to the development of a resilient economy in the long term.

Debt crises between a country and an international lender as a two-period game

A two-period game between a country and an international lender is developed. In each period the country can repay debt, borrow from international credit markets, loan from an international lender, or default. The international lender can approve or deny the loan. The risk averse country maximizes a time-discounted utility incorporating its consumption. The international lender maximizes a time-discounted utility which values the country's consumption growth positively, and the debt-to-endowment ratio, the loan-to-endowment ratio, and the default penalty negatively. The subgame perfect equilibria are determined with backward induction. It is shown analytically that a country borrows less from international credit markets if it obtains a loan from an international lender and, intuitively, if its endowment increases. In contrast, the country borrows more if its future endowment (in period 2) can be expected to increase, or its initial borrowing is high. The model is simulated applying empirical data from the 2010 Greek crisis. The simulations illustrate how the country consumes in the two periods depending on whether the international lender approves or denies a loan. The impact is assessed of time discounting, risk aversion, default penalties, the country's endowment, interest rates, how the international lender values various characteristics of the country, and initial borrowing and consumption before the game starts.

Economic crisis and crime: Money under the mattress during financial destabilization

The paper investigates the effect of a (semi-) deposit run during a debt crisis on crime rates. The study focuses on Greece’s protracted debt crisis (2009–2018) and analyzes the response of crime to deposit outflows. It shows that deposit outflows corresponded to a significant increase in property crimes (thefts and burglaries), but not other types of offenses. The study provides useful policy insights for regulatory authorities tasked with monitoring and decreasing the criminogenic effects of financial destabilization

Merging Structural and Reduced-Form Models for Forecasting

Abstract Recent economic crises have posed important challenges for forecasting. Models estimated pre-crisis may perform badly when normal economic relationships have been disrupted. Meanwhile, forecasting, especially in central banks, is increasingly based on a suite of models, following two main approaches: structural (DSGE) and reduced form. The challenge remains to identify which model – or combination of models – is likely to make better forecasts in a changing environment. We explore this issue by assessing the forecasting performance of combinations of a medium-scale DSGE model with standard reduced-form methods applied to the Spanish economy and a reference period that includes both the great recession and the sovereign debt crisis. Our findings suggest that: (i) the mean reverting properties of the DSGE model cause it to underestimate the growth of real variables following the inclusion of crisis episodes in the estimation period; (ii) despite this, reduced-form VARs benefit from the imposition of an economic prior from the structural model; but (iii) pooling information in the form of variables extracted from the structural model with (B)VAR methods does not improve forecast accuracy. By analysing the quantiles of the predictive distributions, we also provide evidence that merging models can help improve the forecast in a context including crisis episodes.

Sequential management of energy and low-carbon portfolios

This study explores the ability of clean energy and European Union Allowance (EUA) assets to diminish portfolio risk when mixed with unclean energy assets. We use a family of Asymmetric Dynamic Conditional Correlation-Generalized AutoRegressive Conditional Heteroskedastic (ADCC-GARCH) models and provide a flexible and adaptive estimation and model selection framework based on a sequential strategy with differently sized estimation and validation windows, as well as different model update frequencies. Through this procedure, we obtain accurate estimations of the conditional covariance matrices of day-to-day asset returns and build adequate optimal minimum variance portfolios. The analyzed period (Jan. 2010–May. 2022) includes the latest crisis episodes (Sovereign debt crisis, Brexit, COVID-19, and the Russian–Ukrainian war). Our findings show that since the 2015 Paris Agreement (the only exception being the pandemic period), investing in clean energy companies and EUAs is an attractive investment in terms of return-risk. These results should provide investors with more incentives to decarbonize their portfolios.

The impact of the debt crisis on the salaries of Teaching and Research Staff in national higher education institutions in Greece: a case series study and literature review

The impact of the debt crisis on the salaries of Teaching and Research Staff in national higher education institutions in Greece: a case series study and literature review

SMEs’ financing in the aftermath of the financial and sovereign debt crises: A comparison across euro area countries

This paper studies the financing behaviour of SMEs across 11 euro area countries during the period 2010–2014. Using a firm-level and country representative survey, we construct time-varying country indicators of SMEs’ financing conditions accounting for composition and demand effects. We find a significant increase in the cross-country differences of the use of bank loans by SMEs. We decompose the variance of the time-varying country indicators to investigate two sources for this cross-country divergence: (i) an increase in the variance of shocks faced by the euro area, reflecting uncertainty; and (ii) heterogeneous deterministic paths, reflecting country-specific evolutions of factors such as financing costs, economic conditions or the banking environment. We find that the second mechanism is prominent: the cross-country divergence is mainly driven by a sharp increase (resp. decrease) in bank funding in countries where the use of bank loans by SMEs was originally high (resp. low). Additional results suggest that the increasing bank concentration, the reduction in the number of local branches and the decrease in the deposit-to-asset ratio explain the cross-country divergence regarding SMEs’ access to bank loans.

Analyzing global utilization and missed opportunities in debt-for-nature swaps with generative AI.

We deploy a prompt-augmented GPT-4 model to distill comprehensive datasets on the global application of debt-for-nature swaps (DNS), a pivotal financial tool for environmental conservation. Our analysis includes 195 nations and identifies 21 countries that have not yet used DNS before as prime candidates for DNS. A significant proportion demonstrates consistent commitments to conservation finance (0.86 accuracy as compared to historical swaps records). Conversely, 35 countries previously active in DNS before 2010 have since been identified as unsuitable. Notably, Argentina, grappling with soaring inflation and a substantial sovereign debt crisis, and Poland, which has achieved economic stability and gained access to alternative EU conservation funds, exemplify the shifting suitability landscape. The study's outcomes illuminate the fragility of DNS as a conservation strategy amid economic and political volatility.

The implications of non‐synchronous trading in G‐7 financial markets

AbstractWe investigate the effects of non‐synchronous trading on volatility spillover for the G‐7 equity markets during the Eurozone sovereign debt crisis (ESDC) and the Covid‐19 pandemic crisis. For data synchronisation we utilise ΜΑ(1) adjusted return series to estimate the Baba‐Engle‐Kraft‐Kroner (BEKK) and the dynamic conditional correlation (DCC) models. We also consider the use of realised kernels as explanatory variables in the variance equation. In this set up, the contagion effects during crises periods are more perceptible, as the spikes are easier to interpret. We also check the robustness of our main results by applying, wavelet coherence analysis to G‐7 major equity indices with realised kernels, as well as local Gaussian correlations (LGC). Our findings suggest the empirical significance of the synchronisation effects for the US and the other G‐7 equity markets. We also conclude that realised kernels is an effective tool for mitigating non‐synchronous effects. These results underline the significance of quantifying the synchronisation effects in equity markets as well as international portfolio diversification strategies.

Sovereign debt crises and low interest rates

We revisit the occurrence of self-fulfilling crises in sovereign debt markets under time-varying interest rates and growth in Eaton and Gersovitz (1981)’s model. We show that, when long-term interest rates exceed growth, insolvency is solely caused by the exhaustion of the sovereign’s debt repayment capacity subject to limited commitment. Indeed, high interest rates impose discipline on market sentiments, because creditors necessarily become more optimistic about solvency when the sovereign reduces debt exposure. Creditors’ beliefs respond instead ambiguously under low interest rates fluctuating around growth. As long as interest rates exceed growth, debt reduction alleviates the fiscal burden. However, the sovereign also benefits from the prospect of rolling over outstanding debt as long as interest rates remain below growth. Thus, creditors’ sentiments might adjust adversely to fiscal consolidation. When the default punishment is not disproportionately severe, this mechanism sustains belief-driven debt crises even when fundamentals would otherwise ensure solvency.