The systemic character of the sovereign debt crisis policy implications and governance issues
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The Systemic Character of the Sovereign Debt Crisis: Policy Implications and Governance Issues. Argentino Pessoa CEF.UP, Faculdade de Economia do Porto, Portugal Email : [email protected] The Euro Area Debt Crisis: structural mechanisms. Saving rate. Exchange risk. Interest rate.

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The Systemic Character of the Sovereign Debt Crisis: Policy Implications and Governance Issues

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The systemic character of the sovereign debt crisis policy implications and governance issues

The Systemic Character of the Sovereign Debt Crisis: Policy Implications and Governance Issues

Argentino Pessoa

CEF.UP, Faculdade de Economia do Porto, Portugal

Email: [email protected]


The euro area debt crisis structural mechanisms

The Euro Area Debt Crisis: structural mechanisms

Saving rate

Exchange risk

Interest rate

Single currency

Foreign borrowing

2008 crisis

Sovereign debt

Automatic stabilizers


The euro area debt crisis the beginning

The Euro Area Debt Crisis: the beginning

Current account deficits

Budget deficit

Trust

Debt yields

Political factors

Concerns over fiscal sustainability

Heavy borrowing


How do increase competitiveness

How do increase competitiveness?

Currency devaluation

Competitiveness

Internal devaluation

Interest rate

Financial markets

deflationary policies

Economic growth

Budget deficit

Automatic stabilizers


The need for fiscal discipline and the coordination failure

The need for fiscal discipline and the coordination failure

Single currency

Single fiscal structure

EDP

Debt ?

SGP

Coordination

Current account???

National fiscal rules


The euro zone s vulnerability

The Euro zone’s vulnerability

Fear of default

Recession

Liquidity stops

Solvency crisis

Budget deficit

Interest rates on gov. bonds

Other member countries

Economic growth

Banking crisis

Credit reduction


Systemic nature of the crisis

Systemic nature of the crisis

  • Implications:

    • Financial markets can force member states into default;

    • The fear of default in a member makes more fragile the banking system of the other members.

  • Two problems:

    • Coordination failure;

    • Negative externalities (contagion)


Optimal solution

Optimal solution

Coordination failure

Collective action

Central bank: ECB (limitless intervention in the market)

Gov. budget:

budgetary union (issue debt)

Internalisation

Externalities (contagion)


Second best

“Second best”

New institutions:

EFSF

ESM

EMF

Drawbacks:

Amount of funds/leverage

Collective action clauses

Level of interest rates


Economic growth

1990

-

2000

2001

-

2008

Euro zone

1

.

56*

0

.

82

EU

2

.

0*

1

.

36

World

1

.

73*

3

.

12

China

5

.

97

10

.

14

India

4

.

1

5

.

44

US

1

.

9

1

.

57

Germany

1

.

54*

0

.

92

Portugal

2

.

13

0

.

89

Ireland

3

.

3

1

.

Economic growth

Growth rate of GDP per person employed (constant 1990 PPP $)

63

Italy

1

.

62

0

.

17

Spain

1

.

08

-

0

.

41

Source: WDI (2011)

Note: * only 1991

-

2000.


Disequilibria inside euro zone

Disequilibria inside Euro zone

Surplus countries

supply of funds

Lower interest rates

Export-led growth

consumption

?

?

Peripheral countries

Higher risk premia

Demand for funds

Austerity

Spending


The solvency condition

The solvency condition

With the current level of interest rates and without growth prospects all the austerity will be vain


Thank you very much

Thank you very much

Argentino Pessoa

CEF.UP, Faculdade de Economia do Porto, Portugal

Email: [email protected]


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