Banks

Advanced economies’ sovereign debt 100 years of data

A 100-year perspective on sovereign debt composition in 13 advanced economies

S. M. Ali Abbas, Laura Blattner, Mark De Broeck, Asmaa El-Ganainy, Malin Hu 27 October 2014

There’s been renewed interest in sovereign debt because the Global Crisis, but relatively little attention has been paid to its composition. Sovereign debt may vary with regards to the currency it really is denominated in, its maturity, its marketability, and who holds it – and these characteristics matter for debt sustainability. This column presents evidence from a fresh dataset on the composition of sovereign debt in the last century in 13 advanced economies.

Banks

A ‘sovereign subsidy’ – zero risk weights and sovereign risk spillovers

A ‘sovereign subsidy’ – zero risk weights and sovereign risk spillovers

Josef Korte, Sascha Steffen 07 September 2014

European banking regulation assigns a risk weight of zero to sovereign debt issued by EU member countries, rendering it an attractive investment for European banks. This column defines a ‘sovereign subsidy’ as a fresh measure quantifying from what extent banks are undercapitalised as a result of zero risk weights. Using recent sovereign debt exposure data, the authors describe the build-up of the subsidy for both domestic and cross-country exposures.

Banks

A “legacy-equity” mechanism to recapitalise the banks

Complementarity of CAP and LAP

The Treasury has highlighted the complementary nature of the programs in countless occasions. Less clear may be the final form the CAP might take. As of now, we realize that following the stress tests are concluded, banks which have insufficient capital to overcome an extreme macroeconomic scenario will get a window of time to improve private capital or even to connect with a contingent convertible preferred shares program. That is a sensible approach, but I really believe a relatively small modification can significantly improve the participation of private capital in the program.

Banks

A ‘what if’ approach to assessing proposals for euro area reform

A ‘what if’ approach to assessing proposals for euro area reform

Learning from mistakes: A ‘what if’ method of assessing proposals for euro area reform

George Papaconstantinou 21 June 2018

The policy discussion on euro area reform has entered a crucial phase. This column, portion of the VoxEU debate on euro area reform, attempts a ‘what if’ experiment predicated on the proposals in the recent CEPR Policy Insight. Concentrating on the Greek case, it talks about the counterfactual case of such proposals having recently been implemented first of the crisis and examines their potential role in avoiding the outbreak of the crisis or mitigating it once it had been underway.

Banks

A “deal” mentality is bad macroeconomics

A “deal” mentality is bad macroeconomics

Ricardo Caballero 05 March 2009

The Obama team’s strong words are accompanied by policies focused on obtaining a ‘deal’ for taxpayers. Here among the world’s leading macroeconomists argues that squeezing current stakeholders for political appearance is short-sighted and self-defeating. Before systemic panic is alleviated, the crisis will continue. This involves the investment of massive political capital at this time; we are running out of time.

Banks

21St century shell game how bankers play and taxpayers pay

The shell game: “Now you view it, today you don’t.”

The Fed’s low-interest-rate insurance plan has developed into shell game for everyone who cannot follow how the funds flows from losers to gainers.

  • The bailouts of the banks through the crisis were apparent for all to look at and brought on widespread outrage; now the general public is being told they are getting repaid free to the taxpayer.
  • What the general public is not told is certainly that the repayments arrive to a considerable extent out of revenues paid out by taxpayers for the banks to carry Treasuries.
  • Both parties supported the bailouts therefore neither party seems prepared to protest the declare that they are becoming repaid free to taxpayers.

The goals of monetary plan

Present monetary plan achieves two aims.

  • One is usually to recapitalise the banks also to do therefore without the federal government taking an collateral stake.

The authorities usually do not want to be billed with “nationalisation” or “socialism.” Therefore the banks need to be provided the money outright. Economists possess agonised a whole lot lately about the zero lower bound to the interest as an obstacle to successful policy in today’s circumstances. The agony appears misplaced. So long as the big banks should be subsidised, you will want to just pay out them to simply accept reserves from the friendly central bank?

Banks

10 Reasons why bailouts should stop before reaching spain

Neither Portugal nor Belgium and also less Spain possess net debt levels as substantial as those of Greece. Nor perform these countries have large banking solvency problems guaranteed by their government, as regarding Ireland. The actual bail-outs aren’t well designed and makes solvency problems worse for the bailed-out member country. One problem is definitely that the brand new Facility cannot choose the afflicted country’s debt for an interval of 5 years, as the bailed-out country implements the tough adjustment imposed by the Eurozone. The Facility is allowed to provide liquidity to the bailed-out country by means of five year loans at substantial rates (5.8% regarding Ireland). This eventually ends up adding considerably more debt along with its already substantial debt obligations. The bailout thus allows temporarily with liquidity, but worsens its solvency circumstance. These perplexing signals have led various investors to sell your debt of Eurozone countries and a good minority of investors to market them brief with a higher leverage making big profits. Because of this contagion continues on at the trouble of the original long-term buyers of Eurozone sovereign debt, namely pension funds and insurance firms that employ it to complement their long term liabilities, or banks that utilize it because of its liquidity properties (it generally does not need a capital provision and may be used to acquire ECB financing when markets will be difficult to end up being tapped). The short-sellers of sovereign debt include made huge profits and so are prepared to continue the practice provided that there is no very clear response from Eurozone authorities. In this manner, contagion could become self-fulfilling. The simplest way to address this problem should be to permit the Stability Fund to get debt in the secondary marketplace, becoming a member of forces with the ECB to avoid contagion spreading additional. The ECB cannot perform it all, constantly, and alone. Because of reason #4 4, an increasing quantity of investors will begin to think that this debt crisis will end breaking-up the Eurozone, threatening the survival of the euro. These beliefs are really dangerous because it established fact that debt sustainability is a lot longer when debt can be denominated in the national currency of the issuer than when it’s denominated in a forex. If the Eurozone breaks up, member countries which are actually solvent with their euro debt denominated, can be insolvent if they need to get back to their old, today devalued, currency while keeping their debt in euro. This is why why many Eurozone members cannot keep the euro, because they’ll be defaulting simply by announcing it before also taking that sort of decision. Also Germany cannot exit the euro because, despite the fact that its exit wouldn’t normally business lead it to default – on the other hand, its solvency would increase, it’ll stop growing or undergo another recession. Considering that exporting things and services makes up about 50% of Germany’s GDP and nearly all that is exported to the Eurozone, German exports would have problems with an exit that could result in an appreciation of between 30% and 80% weighed against the devalued currencies of all of those other Eurozone members also to an appreciation as high as 40% versus the dollar, the yen, and the pound. The Eurozone is nearly in equilibrium versus all of those other world, considering that its current account displays a little surplus of 0.2% of GDP. Therefore the Eurozone can be viewed as as a closed market from the global perspective. The current-account surpluses of Germany (6.1% of GDP) and holland (5.7% of GDP) will be the counterparty of the current-bank account deficits of Spain (5.1% of GDP), Italy (2.9% of GDP), and France (1.8% of GDP) to say only the biggest Eurozone members. In addition, you will find a macroeconomic identity between external current account balances and national saving-investment balances, in order that the surplus countries possess an excess of cost savings over investments that require to invest externally and the ones in deficit possess an excessive amount of investment over cost savings that require to finance externally. Addititionally there is another accounting identity exhibiting that the sum of the existing account and the administrative centre account of the total amount of payments of each country increases zero, in order that a region with a current account surplus will need a capital account deficit of the same volume, and vice-versa. Therefore Germany and holland have already been financing the current-account deficits of Spain, Italy, and France by investing in their debt or extending loans. Spain is too large to come to be bailed out. Spain’s inventory of private and open public debt and loans in the hands of the citizens and banks of the others of Eurozone members is nearly €500 billion. A bailout of the size could provoke a banking crisis. Therefore Spain’s bailout could become a “fire break” for the survival of the euro. Nevertheless, to avoid a bailout, Spain must show to all of those other Eurozone members that it’s implementing what it possesses promised to do, that’s, to complete a hardcore fiscal adjustment, another round of labour and collective bargaining reforms, a pension reform, to totally implement the conserving banks restructuring, also to design the training and health reforms. Which means low progress in the brief and medium term and larger potential progress in the long run. A euro crisis would produce extremely negative externalities for all of those other world. Considering that the Eurozone is among the largest worldwide importers and investors, a severe crisis would result in slower global progress or to a dual dip recession. In sum, every country may become a loser from a potential and critical Eurozone crisis. All of them are in the same boat plus they risk sinking along. Finally, Eurozone leaders cannot dare to risk 52 years of European economical integration and 16 years of European financial integration. For this reason they are likely to take considerably more blunt measures as quickly as possible to prevent the present crisis turning out to be self-fulfilling. This problem is currently, so they should prevent spending their energies on discussions in what to accomplish in 2013 and beyond.