- 6.2.2. It’s not Always Fiscal! While budgetary institutions and procedural rules that reduce politicians’ incentives to overborrow are certainly a good idea, debt crises are not always rooted in fiscal misbehavior. This seems a puzzling statement because in our first course of economics we learned that the change in the stock of debt is equal to the budget deficit (formally: ) and that the stock of debt is equal to the sum of past deficits. However, those who work with actual debt and deficit data know that the change in debt is rarely equal to the budget deficit. A For a detailed discussion, see E. BORENSZTEIN, E. LEVY YEYATI and U. PANIZZA (2006), Living with Debt, Harvard University Press for the Inter-American Development Bank.
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- 6.3. Debt and Politics during Liquidity Crises In order to discuss the politics of debt crises, we need to differentiate between solvency and liquidity crises. Solvency is not well defined in the case of sovereign debt. Government assets such as future ability to tax and the country’s territorial integrity do not have a well defined market value and cannot easily, and probably should not, be handed to creditors. Moreover, governments are not expected to stop providing basic social services, disband the military, or stop running their The above discussion is based on Chapter 3 of E. BORENSZTEIN, E. LEVY YEYATI and U. PANIZZA (2006), Living with Debt, Harvard University Press for the Inter-American Development Bank.
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6.3.2. No Big Bazooka and High Interest Rates Crisis packages do not usually come with a big bazooka. The amount of money is limited, disbursed in tranches, and the disbursements are conditional to, usually For a discussion of the first effect see: B. DELONG and L. SUMMERS (2012), “Fiscal Policy in a Depressed Economyâ€, Brookings Papers on Economic Activity and for an analysis of the second effects see: W. EASTERLY, T. IRWIN and L. SERVÉN (2008), “Walking up the Down Escalator: Public Investment and Fiscal Stabilityâ€, World Bank Research Observer, vol. 23(1), pp. 37-56.
- 6.3.3. Is Bad Economics Good Politics? Why are crisis packages often based on bad economics? Probably because bad economics can be good politics. Paul Krugman has argued that it is “...normal to think of economics as a morality play, a tale of sin and redemption, in which countries must suffer for their past excessesâ€11 . As the morality play sells well and it is easy to explain to the public, policymakers are often under strong political http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the-crisis/.
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An alternative explanation is that well-intentioned policymakers postpone defaults to ensure that there is broad market consensus that the decision is unavoidable and not strategic. This would be in line with economic models that assume that sovereign debt contracts include an implicit clause that justifies ‘nec12 E. LEVY YEYATI and U. PANIZZA (2011), “The elusive costs of sovereign defaultsâ€, Journal of Development Economics, vol. 94(1), pp. 95-105.
- C. COTTARELLI (2012), The austerity debate: Festina lente!, http://voxeu.org/article/austerity-debate-makehaste -slowly.
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- EL-ERIAN, M. (2012), Will Europe Be Willing but Disabled?, July 2, 2012 under: www.project-syndicate.org/commentary/will-europe-be-willing-butdisabled.
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- EUROSTAT (2012), www.ec.europa.eu/eurostat.
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H. GROSSMAN and J. VAN HUYCK (1988), “Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputationâ€, American Economic Review, vol. 78(5), pp. 1088-97.
However, this effect seems to be due to differences in labor productivity and market liquidity. The effect of public debt appears to be negligible. P. ALESSANDRINI, M. FRATIANNI, A. H. HALLETT and A. PRESBITERO (2012), “External imbalances and financial fragility in the Eurozoneâ€, MoFiR working paper No. 66.
- K. ROGOFF and J. ZETTELMEYER (2002), “Bankruptcy Procedures for Sovereigns: A History of Ideas, 19762001 â€, IMF Staff Papers, vol. 49(3), pp. 8-23; E. BORENSZTEIN and U. PANIZZA (2009), “The Costs of Sovereign Defaultâ€, IMF Staff Papers, vol. 56(4), pp. 683-741; U. PANIZZA, F. STURZENEGGER and J. ZETTELMEYER (2009), “The Economics and Law of Sovereign Debt and Defaultâ€, Journal of Economic Literature, vol. 47(3), pp. 651-98.
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- KRÄMER, H. R. (1970), “Experience with historical monetary unionsâ€, Kieler Diskussionsbeiträge, No. 5, http://hdl.handle.net/10419/48044.
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L. FORNI and E. ALPER (2011), “Public Debt in Advanced Economies and its Spillover Effects on Long-term Yieldsâ€, IMF Working Papers 11/210.
- PISANI-FERRY, J., SAPIR, A., WOLFF and G. B. (March 2012), “The Messy Rebuilding of Europeâ€, Bruegelpolicybrief, Issue 2012/01, March 2012.
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- SUERF2013_1.book Page 63 Tuesday, March 12, 2013 9:09 AM THE INTERACTION OF POLITICAL, FISCAL AND FINANCIAL STABILITY l a r c i e r safe haven assets thus requires more than ‘just’ a banking union and a fiscal union. It will require a lender of last resort: the ECB, directly or indirectly via the ESM. The existence of a lender of last resort is the key re-insurance mechanism that removes credit risk from sovereign borrowing even in the extreme situations.
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- The Argentinean crisis of 2001/2002 is an example of the importance of balance sheet effects. In the ten years preceding the default, Argentina ran a fairly moderate fiscal policy. The average deficit was 1.2 per cent of GDP and, even in the deepest year of the crisis, Argentina’s deficit was below 3 per cent of GDP. Debt levels were also fairly low, about 55 per cent of GDP in 2001. Over 2001 and 2002, Argentina ran an average budget deficit of less than 3 percent of GDP, but the Argentinean debt-to-GDP ratio went from approximately 55 per cent in 2001 to 150 percent in 2002. As about half of the country’s public debt was denomi4 C. CAMPOS, D. JAIMOVICH, D. and U. PANIZZA (2006), “The unexplained part of public debtâ€, Emerging Markets Review, vol. 7(3), pp. 228-243.
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