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  • Author: William R. Cline
  • Publication Date: 08-2015
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: Using his European Debt Simulation Model (EDSM), Cline examines whether and to what extent additional debt relief is needed in Greece under the new circumstances. Greece's debt burden is significantly lower than implied by the ratio of its gross debt to GDP, because of concessional interest rates on debt owed predominantly to the euro area official sector. The IMF's call for debt relief recognizes the lower interest burden but argues that the gross financing requirement is on track to exceed a sustainable range of 15 to 20 percent. But in the Fund's June Debt Sustainability Analysis that threshold would not be exceeded until after 2030. A sustainability diagnosis based on such a distant future date would seem at best illustrative rather than definitive. The euro area creditors might, nonetheless, be well advised to provide two types of interest relief: an earmarked portion of interest otherwise due to finance a public works employment program; and additional interest relief to compensate for budget shortfalls caused by growth below plan levels. The sovereign debt situation should be alleviated by carrying out the bank recapitalization directly from the European Stability Mechanism to the banks, rather than through the sovereign as the intermediary. The large increase in the ratio of gross debt to GDP imposed by bank recapitalization is mostly an optical illusion because there would be a corresponding rise in state assets, but this increase could, nonetheless, further erode perceptions of sustainability.
  • Topic: Debt, Economics, International Monetary Fund, Financial Crisis, Budget
  • Political Geography: Greece
  • Author: Daniel Gros, Thomas Mayer
  • Publication Date: 03-2012
  • Content Type: Policy Brief
  • Institution: Centre for European Policy Studies
  • Abstract: This paper argues that the new permanent European rescue fund, the European Stability Mechanism (ESM), should be provided with a liquidity backstop by having it registered as a bank – and be treated as such by the European Central Bank. If the crisis were to become acute again, the ESM would stand ready to intervene in secondary markets, potentially with almost unlimited amounts of funding. Access to central bank financing will be crucial in a future crisis, because in such a crisis risk aversion is likely to be extreme, and even the ESM might not be able to raise at very short notice the huge sums that might be required to prevent a breakdown of the financial system. Hundreds of billions of euro might be needed just to top up the programmes for Greece, Ireland and Portugal – and Spain and Italy may require more than a thousand billion euro. Sums of this order of magnitude cannot be raised quickly by a new institution. Simply increasing the headline size of the ESM might thus be of little use.
  • Topic: Debt, Economics, Monetary Policy, Financial Crisis
  • Political Geography: Greece, Spain, Italy, Portugal, Ireland
  • Author: Stefano Micossi
  • Publication Date: 06-2012
  • Content Type: Policy Brief
  • Institution: Centre for European Policy Studies
  • Abstract: Once again the European Council will meet in an emergency session at the end of June, with the eurozone economy in recession and actually plummeting in its Southern periphery. Further doubts are also growing on the sustainability of sovereign debts due to the vicious spiral of deteriorating bank balance sheets, ballooning potential liabilities from banking rescues and widening spreads on government borrowings. The sovereign debt crisis in the periphery has now turned into a fully fledged banking crisis that threatens to spread from Greece to Spain and tomorrow, who knows, to Italy, France and even Germany itself.
  • Topic: Debt, Economics, Regional Cooperation, Financial Crisis, Governance
  • Political Geography: Europe, Greece, France, Germany, Spain, Italy
  • Author: Daniel Gros, Cinzia Alcidi, Alessandro Giovannini
  • Publication Date: 05-2012
  • Content Type: Policy Brief
  • Institution: Centre for European Policy Studies
  • Abstract: What would be the cost if Greece were to exit from the eurozone? This much-debated question cannot be answered with a single number. The consequences of Greece's exit would depend decisively on the exact circumstances of events in the country itself as well as the general state of financial markets in the eurozone.
  • Topic: Debt, Markets, Regional Cooperation, Monetary Policy, Financial Crisis
  • Political Geography: Europe, Greece
  • Author: Marcello Messori
  • Publication Date: 03-2011
  • Content Type: Policy Brief
  • Institution: Centre for European Policy Studies
  • Abstract: After the Greek public debt crisis and the bilateral loans to Greece from the other members of the European Monetary Union (EMU), in May 2010 the Ecofin Council launched the European Financial Stabilization Mechanism (EFSM). In June of the same year the EMU countries instituted the European Financial Stability Facility (EFSF). These two mechanisms, which are charged with providing support to EMU countries in “exceptional difficulty”, received their baptism of fire with Ireland in January 2011 and successfully made their first bond issue on the market.
  • Topic: Debt, Economics, Monetary Policy
  • Political Geography: Europe, Greece
  • Author: Simon Johnson, Peter Boone
  • Publication Date: 07-2011
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: Attempts to resolve the problems in Europe are failing, and the crisis is spreading from Greece, Ireland, and Portugal to larger nations. Europe's financial system relies on moral hazard, i.e., a “no defaults” policy, to attract the funding needed to roll over large amounts of short–term bank and sovereign debt. Now that politicians in creditor nations are calling for private sector burden sharing, investors are demanding higher interest rates to hold these debts. But higher rates may tip banks and nations toward bankruptcy. Europe's banks and financial system are highly integrated across countries. Rising expectations of default in some countries could lead to large-scale capital flight into “safe” countries. This shift will raise concerns regarding solvency and liquidity of many financial institutions. The payments system of the euro area is serving as an opaque bailout mechanism that is currently preventing the euro area from falling apart at this time. If the number of nations in trouble spreads beyond Greece, Ireland, and Portugal, this bailout system will be stressed because of the potential size of accumulated funding. The European Central Bank (ECB) could soon see a vocal debate between inflationist and hawkish (anti–inflation) members. Inflationists will call for large–scale interventions, including bond buybacks and emergency loans, while the hawks will attempt to close loopholes in the payments system that effectively permit each troubled nation to create money needed to finance capital flight and budget deficits. At this stage in the debate, we see little chance that Europe can avoid ending the “moral hazard” regime, in which case it needs to plan for widespread sovereign and bank debt restructurings.
  • Topic: Debt, Economics, Regional Cooperation, Financial Crisis
  • Political Geography: Europe, Greece, Ireland
  • Author: Onur Bayramoğlu
  • Publication Date: 08-2011
  • Content Type: Policy Brief
  • Institution: Global Political Trends Center
  • Abstract: On April 2010, recently after the eruption of the Greek crisis, an unexpected hand from Turkey reached to Greece. Proud with his country's last decade growth figures, Turkey's then Vice Prime Minister, Ali Babacan, paid a visit to Greece in order to share his country's reform period after its 2000/1 crisis, arguing that it could also be a case study for Greece. In this brief, I analyzed Greek and Turkish financial crises. Although it is a mere fact that the structural problems in Greek economy complicate the reform period in Greece, there are certain lessons that Greeks can learn from the Turkish experience. As Turks did after 2001, they should see the crisis as an opportunity to overcome the long time problems . In this regard, Greeks first and foremost should establish consensus among themselves, signaling to the markets that they are ready to face the burdens of the reform period.
  • Topic: Debt, Economics, International Political Economy, Financial Crisis
  • Political Geography: Europe, Central Asia, Turkey, Greece
  • Author: William R. Cline
  • Publication Date: 10-2011
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: On July 21, 2011, the heads of government of the euro area announced a new plan to address the Greek debt crisis. This policy brief presents a simulation exercise that examines whether the new arrangements are likely to provide a sustainable solution. The analysis focuses on four key measures: gross debt relative to GDP; net debt relative to GDP; net interest payments relative to GDP; and amortization of medium-and long-term debt coming due during the year in question, relative to GDP. The new Greek package shows prospective future progress on all four measures, and Greek debt looks much more sustainable after the package than before. Debt also appears considerably more manageable if the criterion is net debt or interest burden rather than gross debt ratio, although even for gross debt the ratio is down substantially by 2020. It also becomes clear that the major contribution of the private-sector involvement (PSI) part of the package is in the form of sharply cutting amortization due, although by avoiding large new borrowing at crisis-level interest rates it also alleviates the interest burden that would otherwise occur.
  • Topic: Debt, Economics, Regional Cooperation, Financial Crisis
  • Political Geography: Europe, Greece
  • Publication Date: 11-2011
  • Content Type: Policy Brief
  • Institution: Oxford Economics
  • Abstract: After protracted negotiations, Eurozone leaders finally agreed on a new package of measures last week. The outline deal has a three-pronged approach aimed at tackling the main aspects of the crisis: reducing Greece's debt burden, avoiding a credit crunch by recapitalising European banks, and preventing contagion to other countries via a boost to the EFSF.
  • Topic: Debt, Economics, Markets, Regional Cooperation, Financial Crisis
  • Political Geography: Europe, Greece
  • Author: Jacob Funk Kirkegaard
  • Publication Date: 10-2010
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: So far so good for the European Union in preventing the Greek sovereign debt crisis from spiraling out of control in the short term. But with Greece in May 2010 requiring an unprecedented bailout from the European Union/IMF to avoid immediate default and 25 of the European Union's 27 member states currently subject to an “excessive deficit procedure” (European Commission 2010i), it remains evident that the European Union's existing fiscal surveillance framework patently failed both before and during the Great Recession and that Europe's leaders must head back to the drawing board for a required long term reform of the EU fiscal policy and surveillance framework.
  • Topic: Debt, Economics, Financial Crisis
  • Political Geography: Europe, Greece