Sovereign Debt Crisis Research Articles

ECB unconventional monetary policy and SME access to finance

Small- and medium-sized enterprises (SMEs) account for two-thirds of employment in the euro area which makes them a priority for the transmission of monetary policy to the real economy. SMEs in Europe experienced a credit crunch following the sovereign debt crisis. Over the period 2014–2019, the European Central Bank (ECB) engaged in unconventional monetary policy (UMP) to restore funding conditions in the euro area, to support stronger economic growth and higher inflation. We use the ECB/EC Survey on the Access to Finance of Enterprises to examine the relationship between monetary policy and SME access to finance in countries that were most affected by the crisis as follows: Greece, Ireland, Italy, Portugal and Spain. We show that the implementation of UMP increases the probability that firms with higher debt-to-assets ratio remain credit constrained in stressed countries, although this effect becomes insignificant in non-stressed countries. Our findings suggest that monetary policy is transmitted unevenly to leveraged SMEs across jurisdictions. Additionally, we find little evidence that risky firms are credit constrained during periods of UMP, when risk is measured from the firms’ own viewpoint. However, our heterogenous analysis shows that smaller and younger firms—which are also considered to be risky—remain credit constrained over this period. Policy should ensure that UMP trickles down to SMEs regardless of their size, age or location. Tweetable line: Leveraged SMEs in stressed countries are more likely to remain credit constrained even when monetary policy is expansionary. Policy must do more to support small and young firms’ access to credit to facilitate higher investment and growth.

Asset purchase bailouts and endogenous implicit guarantees

This paper provides a theory of endogenous implicit guarantees on risky assets, in which a government’s bailouts take the form of asset purchases to alleviate asymmetric information on private liquidity needs. As a result of asymmetric information, direct transfers to agents are imperfect so that, when more constrained agents are also more exposed to a given asset, asset purchases by the government are optimal. When anticipated, this form of bailouts leads to an endogenous implicit guarantee premium so that otherwise risky assets can be traded as if there are risk-free. This possibility of implicit guarantee is amplified by other financial frictions such as risk-shifting. Finally, I show how this form of bailouts can shed light on the buildup of the euro area's sovereign debt crisis.

Is to Forgive to Forget? Sovereign Risk in the Aftermath of Private or Official Debt Restructurings

We examine the link between sovereign defaults and credit risk by distinguishing between commercial and official debt and by taking into account the extent of the final restructuring events, which take place at the end of a default spell. We use a local projection-based approach, combined with propensity score weighting (Jordà and Taylor 2016), to estimate the average treatment effect of the final restructuring on our outcome variables of agency ratings and bond yield spreads. Our results show that the average treatment effect on ratings is negative (and positive for bond spreads) up to seven years following the final restructuring with private creditors, while the opposite holds for official creditors. Furthermore, our results are robust to using a panel analysis, which allows us to investigate the importance of the final haircut size. Specifically, we find that the rating (spread) variation (increase) is larger for cases with deeper haircuts. Therefore, we find evidence that official and private defaults have different costs and then may induce selective defaults.

Self-Fulfilling Debt Crises with Long Stagnations

We assess the quantitative relevance of expectations-driven sovereign debt crises, focusing on the Southern European crisis of the early 2010’s and the Argentine default of 2001. The source of multiplicity is the one in Calvo (1988). Key for multiplicity is an output process featuring long periods of either high growth or stagnation that we estimate using data for those countries. We find that expectations-driven debt crises are quantitatively relevant but state dependent, as they only occur during stagnations. Expectations are a major driver explaining default rates and credit spread differences between Spain and Argentina.

The impact of financial development on house prices

AbstractWe examine the relationship between financial development and house prices in the Group of Seven (G7) countries over the period 1870–2016. We use parametric panel data models that incorporated interactive fixed effects and non‐parametric models that allow us to examine non‐linearities and the time‐varying nature of the relationship. Our parametric estimates show a positive relationship between financial development and house prices. The results from our non‐parametric model not only reinforce this finding but also shows evidence of a negative effect of financial development prior to the mid‐twentieth century, suggesting a time‐varying non‐linear impact. We find that inequality and mortgage loans are mechanisms through which financial development transmits to house prices. Financial crisis moderates the relationship between financial development and house prices, although this works only through sovereign defaults. Our findings are robust to a suite of robustness and sensitivity checks.

The Greek Crisis Under Structural Constraints

This article studies the Greek crisis since 2009 with a synthesized Marxian framework by embedding the Greek capital accumulation process into the capitalist core-periphery structure in the European Union, which deteriorated the competitiveness of Greece and adversely impacted its capital accumulation, leading to a relatively low profit rate in the neoliberal era. Institutions of the European Union helped Greece turn to debt-driven accumulation to sustain growth, especially the external debt of government, but the weak productive accumulation because of relatively low profit rate made the accumulation of debt unsustainable in the long run. When doubt was cast on Greece’s capacity to repay its debts, the economy lost external sources of funding, leading to a halt in debt expansion and the burst of the sovereign debt crisis. JEL Classification: E11, F02, O10

Effects of information quality on signaling through sovereign debt issuance

This paper develops a sovereign debt model proposing that a debt issuance can be a credible signaling channel between a sovereign government and foreign creditors. The government has private information regarding the future economy. The one with a good economic outlook would like to find a credible way to disclose it to obtain a high bond price. Foreign creditors are interested in inferring the government’s private information to assess sovereign default risk precisely. The government’s private information is imperfect, so the precision of information matters. We study how the interaction of the prior, the signal, and its precision affects the equilibrium and the resulting welfare. We propose a unique separating signaling equilibrium demonstrating the feature that a more precise signal of good economic outlook leads to a greater extent of fiscal austerity. As the information becomes more precise, the signaling cost for a government with a good economic outlook increases. Interestingly, unless the prior is very pessimistic, a highly precise signal harms the sovereign because a resulting strong signaling motive drives it to reduce bond issuance excessively (paradox of highly precise information).

Foreign exchange market return spillovers and connectedness among African countries

This paper examines the foreign exchange return shock spillovers and network connectedness among African countries during crisis periods using (Diebold & Yilmaz, 2012; 2014; 2016) which is based on generalized VAR and network theory between June 2004 and June 2021. Overall, the study found a low system-wide spillover connectedness among African foreign exchange markets. However, the total systemic spillover index increased during the eurozone sovereign debt crisis followed by global financial crisis, indicating evidence of contagion effects. This offers good diversification opportunities in the African currency market during crisis periods. The study also found no significant evidence of spillover effects among African currencies. Nonetheless, the network connectedness analysis found a positive significant pairwise return spillovers from the South African rand, Moroccan dirham and the CFA francs to Botswana pula, and from Moroccan dirham to CFA francs and South African rand. Furthermore, the study found South African rand, Moroccan dirham and CFA francs as the most significant net-transmitter of return shocks to other currencies whiles the Kenyan shilling and Botswana pula are the net-receivers of return shocks from other currencies. These results have implications for African central banks interventions in stabilizing their exchange rates to facilitate intra and inter-African trade and for international portfolio investors in managing their foreign exchange risk exposures.

Socialising the European Semester? The limited influence of Danish social partners on EU policymaking

Many scholars have debated the role of social policy in the new economic governance after the financial crisis and the sovereign debt crisis. While some researchers argue that social policy continues to be subordinated in favour of the economic imperative, others observe a partial but progressive socialisation, both in terms of EU policy outputs (i.e. more focus on social policies) and the governance procedure (i.e. more participation of social actors). This article contributes to this debate by providing a national perspective. Specifically, it investigates whether procedural socialisation at the national level leads to output socialisation at the EU level. Based on two case studies from Denmark during the European Semester, this article finds that despite their active participation, social partners have had no noticeable influence on the Commission’s Country Reports or Country-Specific Recommendations. The results indicate that procedural socialisation may not easily translate into output socialisation. The article argues for more nuanced insights into the socialisation debate.

Unpleasant surprises? Debt relief and risk of sovereign default

PurposeThe Covid-19 pandemic has rekindled interest in sovereign debt crises amidst calls for debt relief for developing and emerging countries. But has debt relief lessened the debt burdens of emerging and developing economies? The purpose of this paper is to empirically address this question. In particular, the focus is on the implications of debt relief and institutional qualities for sovereign debt in emerging and developing economies.Design/methodology/approachThe model extends the framework on the probability of default by incorporating the receipt of debt relief by a debtor country. Doing so allows to better explain movements of sovereign defaults relating to debt relief. The model is estimated via the regular probit regression.FindingsThe analysis shows that the debt relief provided, thus, far, failed to ease the debt overhang problems of developing and emerging countries and reduced investment. The current debt relief schemes may underscore the prospects of self-enforcing and self-fulfilling sovereign debt crises rather than eliminating the dilemma completely. Regarding the forms of debt relief, the analysis shows that debt forgiveness offers favourable prospects in terms of debt sustainability and economic outcomes than debt rescheduling. Perhaps, the sovereign debt crises, particularly in low-income countries, hinge on insolvency problems rather than transitory illiquidity issues.Practical implicationsAny debt relief mechanism should consider seriously the potential incentive effect that reinforces expectations of future debt-relief initiatives. Importantly, solving the sovereign debt problem requires a programme for sustained investment and economic growth, while not discounting the critical role of prudent debt management policies and institutions.Originality/valueThis study contributes a different angle to the debate on sovereign debt distress. Aside from the structural and economic factors, this study investigates the role of debt management policy in the debtor nation and the implications of debt relief benefits for sovereign risk. The framework also focuses on whether the different forms of debt relief exert distinctive impacts.

Extreme time-varying spillovers between high carbon emission stocks, green bond and crude oil: Evidence from a quantile-based analysis

This paper combines quantile regression with time-varying vector autoregressive (TVP − VAR) model to study extreme spillover effects among high carbon emission stocks, green bond and WTI crude oil from April 21, 2010 to March 25, 2022. The results display a static total spillover index of approximately 49% at the conditional mean and conditional median estimates; while about 83% under the left tail and right tail estimates. The quantile-based spillover model is better than the mean-based one, because the former better captures the risk contagion mechanism under extreme market conditions. In addition, under extreme market conditions, green bond and WTI crude oil are net receivers of systemic shocks, while the remaining markets analyzed are net transmitters. The connectedness is time-varying in all cases, but the tail is less volatile. The analysis of relative tail dependence suggests the existence of asymmetric behavior, which implies different spillover effects in bullish and bearish markets. In addition, the European sovereign debt crisis has a much larger impact on spillovers under bearish markets than under bullish markets.

Geopolitics, technology wars and global supply chains: Implications for Africa

ABSTRACT Ongoing US–China geopolitical rivalry could harm Africa. As in the case of the Cold War between the United States and the Soviet Union, when African countries were treated like pawns on a global chessboard, African countries risk getting caught in current US–China geopolitical tensions. These are intensifying following the COVID-19 pandemic when many Africa states are facing their worst socio-economic crisis since independence, as well as a sovereign debt crisis not seen since the 1980s. Africa is institutionally underprepared for the combined effects of these developments. Partly, this is due to persistent governance deficiencies, a constrained global trading environment, and economic under-performance continent-wide. And partly, this is accounted for by Africa’s marginal position in the global system. This article outlines Africa’s potential development pathways against this harsh backdrop, assessing the options for African agency in response to geopolitical rivalries playing out in technology, global supply chains and trade.

Disclosure of Information and Transparency in Public-private Partnerships: a Comparative Study Between Portugal and the UK

ABSTRACT This paper studies the adequacy of financial and non-financial disclosures in the government’s consolidated annual report for political accountability of public-private partnerships (PPPs). The empirical evidence from the comparative study shows that neither the UK nor Portugal complies with the information needs of the parliament because several disclosures deemed necessary for the functioning of the political accountability relationship are missing. Furthermore, in the case of Portugal, resource dependence and coercive institutional pressures related to the financial bailout during the sovereign debt crisis justify the increase in the level of disclosures. Such evidence also suggests that a comprehensive external reporting framework for PPPs in their post-procurement phase should be devised. The results present novel evidence concerning public sector accounting comparative studies by focusing on specific transactions and may have important implications for policymakers regarding the design of the disclosures deemed necessary.

Sovereign Debt Crises and Sovereign Spreads: A Review of Academic Literature

Sovereign Debt Crises and Sovereign Spreads: A Review of Academic Literature

The Italian cooperatives' dynamism during the pandemic. A regional analysis

During the Covid-19 pandemic, cooperatives increased their business perfor-mance by supporting local communities and fostering collective well-being. This countercyclical feature is also present during other economic recessions and structural shocks, particularly in areas lagging in economic development, such as Southern Italy. The paper analyses the 2012-2019 data between the sovereign debt crisis and the beginning of the world health emergency. Author employs the technique of sec-toral-territorial decomposition (SSA) of the growth of regional economies, argu-ing for the relevance of considering cooperatives as the result of a specific milieu, institutional environment and distinct ‘social capital of opportunity'. The latter is the result of polanyan double movement, increases through the quality of antifragility, the weberian ethics of responsibility and social reflexivity and stimulates economic actors (entrepreneurs, consumers, institutions, etcetera) adaptation to the condition of lasting polycrisis.

Sovereign Default and Tax-smoothing in the Shadow of Corruption and Institutional Weakness

Sovereign Default and Tax-smoothing in the Shadow of Corruption and Institutional Weakness

The Role of International Reserves in Sovereign Debt Restructuring under Fiscal Adjustment

Highly indebted developing economies commonly also hold large external reserves. This behavior seems puzzling given that governments in these countries borrow with an interest rate penalty to compensate lenders for default risk. Reducing debt to the same extent as reserves would maintain net liabilities constant while decreasing interest payments. However, holding reserves can have insurance benefits in a financial crisis. To rationalize the levels of international reserves and external debt observed in the data, a standard dynamic model of equilibrium default is extended to include distortionary taxation and debt restructuring. This paper shows that fiscal adjustments induced by sovereign default can generate large demand for reserves if taxation is distortionary. At the same time, a non-negligible position in reserves modifies the debt restructuring negotiations upon default. A calibrated version of the model produces recovery rate schedules that are increasing with reserves, as seen in the data, being also able to replicate large positions of reserves and debt to GDP. Finally, I study how both mechanisms play a key quantitative role to generate such result, in fact, not including them, produces a counterfactual demand for reserves that is close to zero.

Sovereign Default and Tax-Smoothing in the Shadow of Corruption and Institutional Weakness

Sovereign Default and Tax-Smoothing in the Shadow of Corruption and Institutional Weakness

A proper developmental state framework for Greece

Post World War II, Greece was enjoying, by and large, significant economic growth that was only slightly lower than that of other Western European nations. However, immediately after the financial crisis of 2007-2008, the country faced a sovereign debt crisis. This continuing multifaceted crisis reached the populace as a series of restrictive measures and sudden reforms (what James K. Galbraith (2016) labels ?economic policy as moral abomination?), which resulted in a very long recession, high unemployment, massive inequalities and marginalization, increased social exclusion, and huge migration of thousands of well-educated Greeks. Within such economic development context, this contribution provides an overview of Greece?s past economic development efforts and challenges (Section 1); discusses important notions of a highly interventionist developmental state framework with ?Greek characteristics? as its main focus (Section 2); and offers developmental state-based policy implications, which are deemed necessary for the revival and global repositioning of Greek industrial sectors of high potential and achievability (Section 3). Summary and conclusions end the article.

Transmission of the 2010 Greek sovereign debt crisis to Asia-Pacific stock markets: A copula-based approach

Transmission of the 2010 Greek sovereign debt crisis to Asia-Pacific stock markets: A copula-based approach