EU Sovereign Debt Crisis Research Articles

Crises and Contagion in Equity Portfolios

We examine the international impact of recent financial crises on contagion dynamics within international equity portfolios. First, we highlight the importance of macroeconomics for portfolio weighting for each region, and then we examine contagion via a structural regime-switching model and a contagion test. We also examine sources of contagion using regime variables, crisis events, and macroeconomic variables. In particular, we study the Argentine debt crisis, the US financial crisis, and the EU sovereign debt crisis. The macroeconomic variables include changes in market capitalization, trade integration, GDP growth, inflation rate, and interest rate. We also employ two classifications, one relating to the portfolio weighting scheme and another one that considers implied global and regional betas. The empirical findings reveal the existence of financial contagion for all the crises that we investigate. Both methods produce similar results. Stronger contagion is evident for global rather than regional betas. Europe is the region with the highest level of contagion and the one mostly affected by the crises. As far as macroeconomic variables are concerned, they are very important in two ways. They statistically significantly explain contagion, while they also reveal contagion under various portfolio weighting schemes. Both methods suggest that the Argentinian crisis mainly contributes to contagion. The research implications suggest that asset allocation and portfolio management should consider both the global and the regional aspects of contagion as differences can occur.

Analyzing the EU sovereign debt crisis by a new asymmetric copula with reversible correlations

ABSTRACT It is well known that a correlation between stock and bond returns had changed in the financial crisis. This paper analyzes it using a novel asymmetric copula. The proposed test is constructed from bivariate split normal distribution and can change correlation signs of upper and lower tails of distribution independently. It is shown that the stock–bond correlation of the EU periphery countries in the capital outflow period is asymmetric, in that it is higher in the lower tail than in the upper tail. The lower tail correlation is higher when capital outflowed than in the calm period. The lower tail correlation sign in the inflow period was at odds; Ireland, Italy and Spain had negative lower tail correlation. The correlation reversion of these three countries can be explained by the change of capital movement from inflow to outflow. In contrast, Germany had negative stock–bond correlation before and after the crisis.

The dynamic effect of macroeconomic news on the euro/US dollar exchange rate

AbstractThis study investigates the impact of 70 US and EU macroeconomic news announcements on euro/dollar returns and volatility from November 2004 to April 2014. We use regime smooth transition regression to endogenously define recession and expansion. Our sample period includes the US mortgage crisis and EU sovereign debt crisis. Most news is unstable as its effect varies between these economic states. There are asymmetrical effects between recession and expansion states for both US and EU news, with most US news having a larger impact and nearly double the number of significant EU announcements. Volatility increases for over 85% of news coefficients, with more than half still being significantly different between states.

TAKING THE MEASURE OF CHANGING LABOUR MOBILIZATION AT THE INTERNATIONAL LABOUR ORGANISATION IN THE WAKE OF THE EU SOVEREIGN DEBT CRISIS

AbstractThis analysis investigates changing mobilization at the ILO in response to the labour and social rights shock created by EU and IMF demands in the EU sovereign debt crisis (Crisis Europe or euro-crisis). Mobilization means the purposeful use of legal norms and institutions by social movements and civil society groups to advance identified policy goals. It can be contrasted with the use of legal norms and institutions by individuals or entities to settle disputes affecting them. After introducing relevant features of euro-crisis and the ILO, the article develops an analysis that measures changing mobilization at the ILO during euro-crisis. It then shows how such an analysis makes two key contributions: first, to our understanding of the ILO and, second, to how we approach mobilization. First, by viewing the ILO as a rights mobilization structure, it shows the vitality and interest of doubted or neglected ILO supervision and complaints mechanisms. Five elements are underlined: the ILO is more than existing literature assumes; it questions the depiction of the ILO as a ‘toothless tiger’; the sharp divide between unions and NGOs is overstated; certain institutional design features make the ILO a good venue for transnational mobilization; the ILO is not transparent in terms of access to documents relevant to mobilization and compares poorly in this respect with UN Human Rights Treaty Bodies. Second, by setting it against existing literature, it is shown how measuring mobilization is distinctive within the broader human rights mobilization scholarship. The most important insights it introduces are: rejecting the assumption that mobilization inevitably follows a significant rights shock such as euro-crisis; addressing the puzzles of union ‘mobilization’ and motivation; operationalizing measurement of mobilization against the backdrop of venue choices; considering how to deal with an international organization which is both a mobilization venue and an engaged actor.

Taking the Measure of Changing Labour Mobilization at the International Labour Organisation in the Wake of the Sovereign Debt Crisis

This analysis investigates changing mobilisation at the ILO in response to the labour and social rights shock created by EU and IMF demands in the EU sovereign debt crisis (Crisis Europe or euro-crisis). By mobilisation I mean the purposeful use of legal norms and institutions by social movements and civil society groups to advance identified policy goals. It can be contrasted with the use of legal norms and institutions by individuals or entities to settle disputes affecting them. After introducing relevant features of euro-crisis and the ILO, it develops an analysis that measures changing mobilisation at the ILO during euro-crisis. It then shows how such an analysis makes two key contributions: firstly, to our understanding of the ILO and, secondly, to how we approach mobilisation. Firstly, by viewing the ILO as a rights mobilisation structure, it shows the vitality and interest of doubted or neglected ILO supervision and complaints mechanisms. Five elements are underlined: the ILO is more than existing literature assumes; it questions the depiction of the ILO as a ‘toothless tiger’; the sharp divide between unions and NGOs is overstated; certain institutional design features make the ILO a good venue for transnational mobilization; the ILO is not transparent in terms of access to documents relevant to mobilization and compares poorly in this respect with UN Human Rights Treaty Bodies. Secondly, by setting it against existing literature, I show how the angle of measuring mobilisation is distinctive within the broader human rights mobilisation scholarship. The most important insights it introduces are: rejecting the assumption that mobilisation inevitably follows a significant rights shock such as euro-crisis; addressing the puzzles of union ‘mobilisation’ and motivation; operationalising measurement of mobilisation against the backdrop of venue choices; considering how to deal with an international organisation which is both a mobilisation venue and an engaged actor.

Understanding massive youth unemployment during the EU sovereign debt crisis: a configurational study

After the economic downturn of 2008, youth unemployment rose rapidly in the EU. Simultaneously, many countries were also facing increasing public deficits. In this context, the EU developed a set of policies to tackle youth unemployment and public debt. While policies to fight unemployment were underpinned by the concept of social investment, austerity was seen as the best way to reduce public debt. These different approaches to the crisis led to a growing tension between the two policy areas. This problem was particularly visible in the countries most affected by the sovereign debt crisis where youth unemployment remained very high for a long period of time. Not only were countries with high public debt and low growth unable to invest sufficiently in active labour market policies (ALMPs), but also, at the same time, austerity policies depressed the economic activity. This study uses the fsQCA methodology. Our results point to the existence of one necessary condition for high youth unemployment—low expenditure on ALMPs. The analysis of sufficient conditions points to the existence of one configuration: the countries most affected by the sovereign debt crisis and characterized by having a demand-led growth model, combined a low GDP growth with a low expenditure on ALMPs. Together, this led to high levels of youth unemployment.

Chinese Investment in Central and Eastern European Countries – A Study of Motivations

China has started to engage in the overseas investment to obtain maximized profit and improve the competitiveness from 1990s since the government supportted and encouraged enterprises to ‘go out’. Moreover, the financial crisis and EU sovereign debt crisis as a windows opportunity attract more and more Chinese investment. Therefore, it becomes a hot debate in accordance with the motivations in which factors drive the Chinese investment in central and eastern Europe. The different opinions between western and eastern Europeans are mainly collected and analysed. The paper is going to answer the question that the motivations of Chinese investment in CEE countries from both the perspective of China and CEE countries to test the political and economic implications.

Estimating Malmquist productivity indexes using probabilistic directional distances: An application to the European banking sector

Our paper by adopting the latest advances on the probabilistic characterization of directional distance functions as has been introduced by Daraio and Simar (2014), develops a Malmquist productivity index and presents its main decompositions. Specifically, the proposed productivity index is based on the probabilistic version of directional distance functions which are expressed as transformations of radial distances. We illustrate how these indexes can be computed and how different components can be derived. Specifically, we demonstrate how a probabilistic version of the following categories of change can be obtained: technical, efficiency, pure efficiency, scale efficiency, scale change factor and scale bias of technical change. Finally, we apply the probabilistic productivity indexes alongside with their decompositions to inputs/outputs data from a sample of 644 banks from 28 European countries between the years 2007, 2010 and 2014. The results suggest that the EU banks’ productivity levels remained relative unchanged from the initiation of U.S. prime crisis and during the EU sovereign debt crisis. Finally, during the U.S. prime crisis and the Global Financial Crisis, banks’ maintained their productivity levels by utilizing better their inputs and by exploiting scale economies. However, during the sovereign debt crisis banks maintained their productivity levels by investing on financial engineering competences.

Survival of the Selfless: The EU Sovereign Debt Crisis and Its Effect of Relationships between Member States

The European Union is a project designed to bring unity and peace through prosperity. It aims to turn the European continent into the peaceful habitat where 50 distinct and different nation states cooperate and act as a single organism. Its founders aimed to have perpetual peace in the European habitat where all participants cooperate and share. This article is a description of the strongest test this project has had to date, the sovereign debt crisis, and its impact on the relations between member states in the EU. We begin by describing the EU project idea and design and the difficulties it found itself since the beginning of the global financial meltdown of 2008. This was the first major crisis for the Union and it demonstrated lack of proper structural design and volatility of its institutions. As a result, the sovereign debt crisis was characterized by a selfish crisis management mode. The continent was once again divided in the center and the periphery. The center was composed of countries lying in in the inner part of the continent, with high industrial output and financial capabilities. The periphery is composed from countries geographically lying on the edges of the continent and with a high level of debt and low industrial output. Instead of increasing the pace for closer cooperation, the EU moved toward building fault lines with the center trying to impose solutions to the periphery. This article argues for a selfless crisis management mode as the solution to the EU problems. Europeans should act for “the greater good” and consider the nonperforming members as part of a greater whole, a sole organism. The whole body should engage in solving the problems. It is time to complete the EU project building the structures of a single operating unit.

After the EU Sovereign Debt Crisis, the Effects of Labour Migration on Regional Economies in European Union: Focused on Scale and Diversity of Labour Migration in the EU

본격적인 중동유럽 확대시기부터 재정위기 이전까지 유럽연합은 생산요소의 이동이 보장되는 완전한 공동시장으로 거듭나고 있었다. 그러나 2000년대 공동체 내 자본과 노동의 선순환 과정은 재정위기 이후 급속히 단편화되는 경향을 보여 왔다. 본 연구에서는 EU 내 위기가 지속되고 있는 원인을 공동체 내 노동이주 흐름의 변화에 의한 구조적 문제점에서 찾고 있다. EU 내 위기의 지속과 유로존 내 위기국가들이 노동이동 및 임금감축 등을 통해 비대칭 충격의 조정을 겪는 과정 본질에 있다고 보고 있다. 이에 본 논문은 심화한 지역통합 내 통화동맹에 가해진 충격의 단편적 조정과정이 장기적인 관점에서 지역 간 불균형을 심화시킬 수 있음을 고찰하였다. 본 논문에서는 시기를 구분하여 EU 노동이주를 분석한다. 중․동유럽 확대시기와 유럽재정위기 이후를 구분하여 공동체 내 이주흐름을 규모 및 다양성 측면에서 비교하였다. 더불어 공동체 내 노동이동이 진전됨에 따라 국가별 임금이 조정되어 경제수준이 위기 이전으로 수렴되고 있는지에 관하여 분석하였다. 유럽재정위기 이후 해당 지역 사례에서 위 현황을 분석한 결과 단기적으로 경제적 효과가 드러나지 않았으며, 중장기적으로 부정적 측면이 증가한 것을 알 수 있다. 즉 공동체 내 시민권자들이 역내이주를 당면한 최대 문제점으로 인식함과 동시에 개별 회원국이 정책적으로 이주에 대한 방어적 태세를 갖추게 함으로써 부정적 영향력이 증대함을 검증하였다.

Growth through increase in access to finance: Recommendations for SEE

Since the impact of the global financial crisis of 2007/2008, and a subsequent impact of EU sovereign debt crisis of 2010, transition countries of South East Europe (SEE) have been in recession, stagnation or had very low growth rates. The debate on how to initiate growth in SEE is frequently focusing on austerity measures, attraction of FDI, structural reforms, fiscal policy stimulus or simplification of business procedures. This paper is focusing on a set of potential measures in the area of increasing access to finance for local small and medium-sized enterprises (SMEs) and other local companies capable of achieving competitive output in tradable part of gross domestic product (GDP). In other words, how to ease financing of endogenous entrepreneurs and help them evolve into competitive local, regional and eventually European companies? Analysis in this paper is focused on five important areas for better access to finance: non-performing loans (NPLs), collateral valuation, credit risk guarantees, nonbanking financial institutions (both credit institutions and securities institutions), and monetary policy and bank regulation and supervision. In all of these areas important improvements are possible.

Accounting for Goodwill and Manipulation

We explored some links between earnings management and accounting fraud. Most previous studies ignored the connections between earnings management and accounting fraud. This study attempted to find the linkage between them by exploring some cases. In particular, we focused on M&A deals. Accounting for acquired goodwill has been subject to considerable debate for at least the past 50 years because the accounting tends to provide managers with discretion to manipulate accounting figures. The European Securities and Markets Authority (ESMA) reported that overall impairment losses on goodwill amounted to only €40 billion from the €790 billion of goodwill in spite of the EU sovereign debt crisis in 2011. This showed that managers tended to intentionally avoid impairments losses. Goodwill accounting gives managers opportunities to manipulate accounting figures. This study used two case studies to explore the accounting manipulation through M&A transactions. The first case is the scandal of Olympus Corporation (Olympus) which is one of the most famous accounting fraud. Olympus had hidden more than $1.5 billion of investment losses through M&A transactions until the scandal exposure in 2011. The second case is the unintentional mismanagement by HP. HP recorded $8.8 billion of the impairment loss of goodwill after the detection of Autonomy’s fraud. The boundary between earnings management and accounting fraud is unclear. Managers have a broad discretion into the accounting for goodwill. This would lead to a high possibility that many companies poorly comply with the requirements of accounting.

Estimating the probability of multiple EU sovereign defaults using CDS and bond data

The ongoing EU sovereign debt crisis is causing great concern about the sustainability of national debt issued by the member states. In this paper, we propose a methodology to estimate the likelihood of the default of one or more countries in the Euro Area by extending the approach in Pianeti et al. [J. Fixed Income, 2012, 21, 44–58] to the case of multiple defaults. We provide an assessment of the marginal, the joint and the conditional default probabilities within the Euro Zone. The adopted measure of systemic risk is the probability of a joint default of the EU countries over a 5 year time horizon. We find evidence of increasing systemic risk and danger of contagion from early 2007 and more significantly from late 2011 onwards. We show that our measure has predictive ability with respect to the equity market.

After EU Sovereign Debt Crisis, Concentrated on Germany of labour migration in the EU

This paper argues that Eurozones sovereign debt crisis brought about different type of labor mobility compared with that of pre-crisis. Before the Eurozone crisis, citizens of EU member countries emigrated to such states as Germany, UK, and the Netherlands; whereas after the crisis, it was heavily concentrated on Germany. This paper focused on the point in particular, to use information about the conditions at the regional level in the single currency area. Before the EU sovereign debt crisis, from 2000 to 2007, a variety of labour migration flows was formed in the community. When 10 new members entered in 2004, between the old and the new EU, there and multilateral labour flows. But noticeable changes have occurred since 2008. EU sovereign debt crisis has led to the recession of the whole community of each countrys economic growth rate decreased and showed an increase in the unemployment rate, which immigration to Germany, the most secure country in this region.

Speaking to the Markets or to the People? A Discursive Institutionalist Analysis of the EU's Sovereign Debt Crisis

Research Highlights and Abstract Uses ‘discursive institutionalism’ as its analytic framework, by focusing on the wide range of EU leaders’ ideas about the crisis and how they have communicated about them. Examines the different ways in which the scholarly literature analyzes those ideas and discursive interactions, and how they lead one to consider different aspects of the crisis. Argues that there are disconnects between what EU leaders say to one another in the ‘coordinative discourse’ at the EU level and between what they say about those agreements to the markets and to the people in the ‘communicative discourse’. Suggests, with regard to the markets specifically, that EU leaders have proposed solutions that were seen as too little too late; were considered to be the wrong solutions; or raised new contingencies that the markets themselves had not anticipated. Shows, with regard to the people, that EU leaders' communication of the wrong or misleading messages meant that national publics were often not prepared for the reform initiatives taken, and that this has often left the field open to the extremes of the right and left. The EU's sovereign debt crisis is not just economic; it is also political, resulting from the failure of EU leaders to offer solutions that calm the markets and convince the people. These failures stem from problems with EU leaders' ideas about how to solve the crisis as well as their communication about them. That communication encompasses not just EU leaders talking to one another in negotiations of crisis solutions but also speaking to ‘the markets’ and to ‘the people’ about those solutions, all of which may interact in perverse ways. This article uses the analytic framework of ‘discursive institutionalism’ to consider the different forms, types, levels, rates and mechanisms of change in ideas followed by the EU leaders'discursive interactions in the ‘coordinative’ discourse and their ‘communicative discourse’ to the global markets and European publics. It uses a range of country cases, but in particular Germany and France, in illustration.

The DOs and DON’Ts of credit default swaps (CDS) in the context of the EU sovereign debt crisis

The unprecedented global financial crisis and economic downturn that hit the world in 2007–2008 has resulted in the deterioration of budget deficits and has caused an overall increase of sovereign debt levels globally. The turmoil of the banking sector was mitigated by a large infusion of government financial aid, which in turn resulted in a considerable increase in the amount of sovereign debt, thereby undermining the fundamentals of sovereign debt sustainability and producing a severe deterioration in the borrowing conditions. With the European sovereign debt crisis, the structure, legality and enforceability of credit default swaps (CDS) have been tested. In this article we examine what has happened so far and where we now stand on the legal issues around these contracts. The article will focus on the unfolding of the Greek crisis, which ignited the whole debate around the sovereign CDS market in relation to the effectiveness of the instrument. Secondly, the article provides a brief overview of the legal nature of the instrument and the International Swaps and Derivatives Association, Inc. documentation. Thirdly, an analysis of the CDS market is put forward aiming at identifying how these instruments are used in practical terms, as well as the recent market trends. Finally, some concluding remarks and views regarding the future use of CDS and the do's and don’ts of CDS are provided.

Rating Agencies: Role and Influence of Their Sovereign Credit Risk Assessment in the Eurozone*

AbstractIn this article, the role of credit rating agencies (CRAs) during the 2010–11 EU sovereign debt crisis is assessed. It is concluded that rating agencies lag behind markets, that their business model is flawed, and that the lack of competition renders the big three CRAs with too strong a market position. The reliance on CRAs should be reduced by attaching less importance to them in prudential regulation and accounting standards. At the same time, more competition and transparency is needed to increase the quality of ratings. Finally, several policy options to change the ratings industry are discussed, including the creation of a network of small CRAs, delegation of sovereign debt ratings to the European Central Bank or the creation of a European rating agency.

Investment Protection of Sovereign Debt and Its Implications on the Future of Investment Law in the EU

Since late 2009, an EU sovereign debt crisis has been lingering. The ability of most of the so-called PIIGS States ( Portugal, Ireland, Italy, Greece and Spain) to fulfil their obligations under bonds issued to private investors is still unclear. In case Bilateral Investment Treaties (BITs) entered into by these States cover claims in connection with the default on or restructuring of such instruments, this could give rise to unequal positions of creditors, depending on their home State. Not only could this give rise to inequality between non-EU and EU investors, such different positions could also occur between investors in different countries of the EU and even of the Eurozone. This Article reviews the scope (ratione materiae) of existing intra-EU BITs of the PIIGS States with respect to sovereign debt instruments and restructuring of sovereign debt. The author advocates in this Article a need to amend BITs of EU countries to unambiguously allow for lawful sovereign debt restructuring without compensation being due to investors and to consider the desired scope of a possible new EU investment protection instrument on this subject. Moreover, in view of the 'no bail-out clause' in the Treaty on the Functioning of the EU (TFEU), sovereign debt instruments issued by individual EU Member States should be excluded from the protection under Foreign Trade Agreements to be entered into by the EU and third countries.

Sovereign Debt Crisis in Europe: A Different Crisis with a “Less Than Different” Impact on Bangladesh?

Global economy is going through another round of rough patches. Right after an economic turmoil that originated in the USA, the global economy is experiencing a debt crisis in the EU region. Even though there are certain differences in the nature of the crisis, the possibility of an economic disaster around the world looms over. Bangladesh suffered from the previous financial crisis with a time lag. The country also fears a similar lagged blow from the EU crisis as that region is one of her major trading partners. Export, Aid, FDI and remittance of Bangladesh are feared to suffer from the EU sovereign debt crisis but the impact might not be immediate in case of this crisis as well.