Broner, A. F., Erce, A., Martin, A. & Ventura, J. (2014) “Sovereign debt markets in turbulent times: A view of the European crisis“, VoxEU Organisation, 23 Ιουλίου.
By 2010, Eurozone periphery countries had faced severe debt problems and a falling credit to the private sector. This column proposes a theory to interpret these events. Governments can discriminate in favour of domestic creditors and public debts trade in secondary markets. This leads to a shift in the debt holdings from foreign to domestic residents. Finally, private financial frictions crowd out private investment, potentially reducing growth.
Between the start of the financial crisis in 2007 and late 2009, the Eurozone’s periphery countries saw a substantial reduction in economic growth and an increase in deficits. But their economic performance was, if anything, stronger than that in the core countries. The recessions in the periphery were no deeper than in the core, and financial markets absorbed their increasing public debt as they had done in the past, with non-resident creditors absorbing large portions of the increase. By late 2009, average spreads were still low and the share of sovereign debt in the hands of domestic residents was below 50% in all peripheral countries, and even below 30% in Ireland and Greece (Merler and Pisani-Ferry 2012).
At the end of 2009, as Ireland and Spain reported larger budget deficits than anticipated, and the newly elected Greek government announced that previous deficits were much larger than reported, the situation deteriorated rapidly. Spreads started to rise sharply and the share of debt held by these countries’ private sectors increased (Brutti and Sauré 2013). Thus — and contrary to the logic of optimal diversification — private sectors in the periphery bought a lot of sovereign debt precisely as it became riskier. As domestic banks allocated increasing amounts of funds to the public sector, productive investment declined and private spreads increased, further deepening the recessions. Figure 1 below exemplifies this pattern using data for Spain and Germany.
Σχετικές αναρτήσεις:
- Lof, Μ. & Malinen, Τ. (2014) “Determinants of the growth and sovereign debt correlation“, VoxEU Organisation, 25 Μαΐου.
- Apergis, N. and Cooray, A. (2013) “New Evidence on the Remedies of the Greek Sovereign Debt Problem“, Hellenic Observatory Papers on Greece and Southeast Europe, GreeSE Paper No.79, Νοέμβριος.
- Brender, A., Pisani, F. and Gagna, E. (2013) “The Sovereign Debt Crisis: Placing a curb on growth“, Brussells: Centre for European Policy Studies (CEPS).