European sovereign debt crisis 2011 pdf

Greece bonds were downgraded to junk status. Per the conditions of the loan, we have instituted harsh austerity measures to cut spending and have increased taxes but it has also increased unemployment and has stoked massive protests in Greece.

Our economy has contracted the last three years as a result and the market is once again suggesting that we are on the brink of bankruptcy. We will not be able to rollover our debt or borrow in the market at these ridiculous rates.

If the Northern economies must keep bailing out Europe, then the rest of Europe must behave like us. Germany has the largest economy in Europe and we are the second largest exporter of goods in the world after China. Inflation is low, wages have consistently risen, our education system is robust and our unemployment rate is low. Our public sector is streamlined and is incentivized to make people work. Our businesses, labor unions and my government work hand in hand to make German manufacturing and services productive, advanced and efficient.

If you need Germany to bail-out Greece yet again — they must follow our model. I must also insist that the private investors of the Greek bonds must take some losses — it is not politically viable for me to put huge amount of German tax payer money on the table without private investors taking a haircut. We will not take part in any future bailouts without this condition being met.

We are caught between a rock and hard place. This will give them breathing space to put their house in order and become solvent again. I urge private sector banks to do the same. Furthermore, the ECB is willing to buy debt of Greece and other indebted countries in the secondary market to reduce the interest rates the market is requiring. We have no choice however.

The austerity measures being implemented; the privatization of government entities; and better tax collection, will help Greece to be a viable economy again. We will continue to provide financing and the technical expertise of our best people.

It must clarify the fiscal vision for Europe. Having a monetary union without a fiscal union creates huge distortions like the ones we have seen.

Typically a country like Greece would devalue its own currency when faced with this situation. This would grow its exports as its goods are cheaper in the world markets. Since Greece is part of the EU and the Euro — it does not have that option. Leaving the EU as suggested by some economists will be extremely painful and will trigger a run on Greek banks. We appreciate you dialing in during these difficult personal times that you are facing in America.

I have faced many such charges myself and you will pull through my friend! I think the markets will be pleased. We have taken a stand that all EU members will support the Euro — no matter what happens. We will have to monitor Italian and Spanish interest rates.

This dwarfs Ireland, Portugal and Greece combined. We will not be able to bail out Spain or Italy — your economies are too big. I suggest you put through a solid fiscal consolidation package to regain the confidence of the markets. Leave a comment. You are commenting using your WordPress. You are commenting using your Google account. You are commenting using your Twitter account.

You are commenting using your Facebook account. Notify me of new comments via email. Economists say the weaker members of the eurozone will not be able to repay their debts and live without bailouts until economic activity resumes in a big way. The ECB recently lowered its forecast for economic growth across the eurozone for this year and next.

The central bank now expects growth of only 1. Both are down from earlier forecasts, and the risks to that gloomier outlook are now to the downside, rather than balanced as the ECB had previously said. In the second quarter, overall economic activity among the 17 nations that use the euro grew only 0.

Germany, the region's economic powerhouse, reported a paltry 0. But economists say Germany is still on track for modest growth in The German economy is heavily dependent on exports and has benefited from rapid growth in emerging nations such as China. As activity cools in those markets, the outlook for Germany has dimmed. The slowdown raises troubling questions about the long-term outlook for the eurozone. Fate of eurozone is at risk. The crisis has brought to light problems that many analysts say will require a fundamental change in the way the European Union operates.

The eurozone nations have enjoyed the benefits of a shared currency and uniform monetary policy since about However, aside from certain unenforced budget targets, the group has never had a common approach to fiscal policy. The lack of coordination has resulted in a situation where stronger members of the union are now being forced to help support less competitive members that have spent beyond their means.

If they don't, many analysts say the euro project may not survive the crisis in its current form. The fear is that either weak members of the currency union will go bankrupt and be forced out, or stronger members will become unwilling to prop up fiscally challenged neighbors and strike out on their own.

European leaders have said repeatedly that they will do whatever it takes to preserve the euro, arguing for a more uniform approach to spending and taxes across the European Union. But moving towards greater fiscal integration raises serious questions and could involve rewriting EU treaties, something that may take years to achieve. In the meantime, investors have been calling for the creation of a so-called Eurobond, which would be backed by all 17 euro area nations.

Issuing a common form of debt would ease borrowing costs for the weaker members of the union. But it would also drive up rates for the stronger nations and could jeopardize their credit ratings. The European Commission is exploring different Eurobond options in preparation for an official proposal.

But EC officials have cautioned that issuing a new form of debt is not a long-term solution to Europe's debt crisis. Europe's Debt Crisis.

Print Comment. Can more debt help Europe? US Indexes Market Movers. Spain would not have such an impact on any large economy, but a Spanish default would increase the default risk in Portugal by up to 50 bps Figure 4-B.

Both Italy and Spain would also impact Ireland, although the effect from Italy is about three times larger notice that Ireland is plotted on the right-hand axis in Figure 4-A.

To account for the large differences across sovereigns in the amount of their foreign debt, we construct a measure that normalizes for the total amount of external debt of the country with the initial default.

This measure gives the expected spillover losses due to any additional defaults, per dollar of foreign debt of the initial country. It is analogous to the Katz-Bonacich centrality measure that other authors have used to quantify the systemic importance of each entity in a financial network e. As with that measure, our measure can be used to analyze systemic risk and identify which sovereigns pose the greatest threat.

Given a default by sovereign j in period t, we use the above simulations to calculate the change in solvency probabilities among the other sovereigns in the network. These simulated probabilities reflect both the direct effects of the loss of repayments from country j, and any indirect effects from the further losses of repayments from other countries k, etc. This includes any higher order sequences of losses because a new payment 30 The Katz-Bonacich centrality measure does not apply directly in our case because our model is nonlinear.

However our measure similarly captures all the higher order i. The levels and trends are generally similar among all the countries in both panels. This debt is included in the normalization but is not counted toward spillover losses within the sample of European sovereigns. Finally, the weighted average of the spillovers, which uses the total foreign debt amounts Djt as weights, rose to almost 0. To show the aggregate spillover losses, we combine the unnormalized expected spillovers from each sovereign weighted by the baseline probability that it would default.

Moreover, given the fit of our model, we know that these are very close to the total losses implied by the risk-neutral default probabilities imputed from the observed CDS spreads. These series are plotted in Figure 7.

Throughout our sample period, the expected losses due to contagion represent about one half to one percent of the total expected losses. A natural concern is whether these expected losses incorporate market beliefs about the likelihood of a bailout for a sovereign at risk of default. Indeed we think it is reasonable to assume that the observed CDS spreads do reflect market beliefs about possible bailouts.

Accordingly, the total expected losses should be interpreted as expectations for losses that may occur despite efforts to bail out a sovereign e. Similarly, the expected losses due to contagion would incorporate beliefs about further bailouts to prevent additional defaults.

Our finding that the spillovers represent a very small portion of the total losses would not be impacted unless market beliefs about the likelihood of a bailout are drastically different when countries are at risk due to contagion rather than their own internal factors. Specifically, we set the model so that a sovereign experiences no loss in repayments if one of its debtors defaults and recompute the solvency probabilities using the estimated parameters.

Table 5 shows the results of this exercise for Q1. In most cases the difference between the baseline prediction and the no-spillover simulation are negligible. The largest differences are for Ireland and Portugal, which have a reduction in their risk-neutral default probabilities of 15 bps. The exact correspondence converting these default probabilities into interest rates on sovereign debt would depend on several factors, but the changes in the interest rates should be roughly commensurate.

Building on the recent theoretical literature on financial networks, we construct a network model of credit risk among thirteen European sovereigns. Using data on sovereign 32 Specifically, to have a downward bias on our estimate of spillover losses, the market would need to expect greater effort to bail out countries, such as Ireland and Portugal, that have substantial holdings of foreign sovereign debt, compared with Greece.

In that case the solvency probability for Ireland and Portugal would not be as strongly related to the solvency probability of Greece, despite their relatively large holdings of Greek debt. We do not think this scenario is very plausible. Our estimates imply that credit markets perceived the potential spillovers from a sovereign default to be small in magnitude. On average, the predicted losses due to contagion account for only one percent of the total expected losses implied by the sovereign CDS spreads in our sample of countries.

Moreover, simple regression estimates show that comovements in sovereign credit risk have little relationship to the aggregate financial linkages between countries. As a consequence, any model where the transmission of risk is related to these linkages would likely find small spillovers from this channel for contagion, in the European crisis.

These results may provide some guidance toward evaluating the net benefits of sovereign bailouts. Much of the justification for bailouts in the recent crisis relied on an assumption that there would be large contagion effects resulting from a sovereign default. In contrast, our estimates suggest that the risk of contagion—from direct losses to the value of debt holdings, in particular—was relatively small.

This provides one assessment of an important channel for contagion, which may be useful to consider among the many factors that bear on the benefits and costs of a sovereign bailout. We consider four potential issues: correlations in the financial shocks between countries, the endogeneity of financial linkages, endogenous default decisions, and internal amplification mechanisms with different impacts across countries.

Correlations in financial shocks. Although we speculate that a correlation in the financial shocks among countries could be identified, we estimate the model under the assumption that they are independent. If, in fact, the shocks were correlated, such as Xit and Xjt , the observed correlation between pit and pjt would reflect this in addition to the true effects of repayments between countries i and j i.

Hence, a positive correlation in the financial shocks between countries would result in an upward bias. In general, a bias would arise if the observed claim amounts lijt were correlated with the unobservables in period t.

Because these claims are established at the end of the previous period, this would require that the unobservables, specifically the financial shocks, are correlated over time.

This process would yield a positive correlation between the claims of i on j lijt and the current shock for j Xjt , which determines the solvency of j sjt and thereby affects the repayments to i Rit. However, our predicted repayments in the model 5 do not account for the lagged shocks i. This error term would have a positive correlation with our predicted values of Rit because of the positive correlation between lijt and Xjt described above.

This would introduce a negative correlation between lijt and Xit that is not accounted for in our model. However, we think this is an unlikely scenario for two reasons. First, if shocks are correlated across countries as discussed above , then typically there would be no relative advantage to increasing investment abroad. Endogenous default. If default were endogenous, the decision rule for each country would be a function of the state variables known at the time of the payment equilibrium: the network-wide matrix and vectors Lt , Dt , Yt , and Xt.

If we assume that a country does not receive payments on its claims when it defaults and goes into autarky, then the relative value of default should be decreasing in the true equilibrium repayments. This relationship also holds for our predicted repayments based on an exogenous default rule. Amplification mechanisms. Constructing the Network of Financial Linkages The BIS reports asset holdings of financial institutions according to country of ultimate counterparty at a quarterly frequency.

This measure includes all financial assets, not just sovereign debt, that is held by the financial sector. As indicated by the second term in the denominator above, we include these data to compute our adjusted claims measure BIS is the total number of BIS reporting countries. CDS contracts provide insurance against a credit event of a reference entity, which in our case is a sovereign. The purchaser of protection obtains the right to sell bonds issued by the underlying entity, at their face value, to the seller of the CDS contract.

In exchange, the purchaser of the CDS contract makes periodic payments to the seller until the occurrence of a credit event by the reference entity or the maturity of the contract. As such, we assume a constant hazard rate for a sovereign default in order to impute risk-neutral solvency probabilities from the CDS spreads. We compute the discount factor, dt , using empirical yields on US Treasuries. Note that this can be repeated for each sovereign at each date in our sample, providing the panel of implied, risk-neutral quarterly solvency probabilities, pit , required for our estimation.

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Neyman, J. Pan, J. Soetevent, Adriaan R. Stern, Steven. Sturzenegger, Federico, and Jeromin Zettelmeyer. Upper, Christian. Yue, Vivian Z. The figure displays the network structure of aggregate sovereign debt holdings in the first quarter of Countries are represented by their two letter abbreviation in Table 1. Arrows represent bank holdings from one country on the sovereign debt of another.

The figure plots the predicted and observed risk-neutral quarterly solvency probabilities for each country at each quarter in our sample. Observed solvency probabilities are obtained with a transformation of 5-year CDS contract prices, as described in Section 4 and Appendix B.

Predicted solvency probabilities are generated from the estimated network model, specified in equation 5. Country abbreviations are listed in Table 1. The figure shows the change in the risk-neutral probability of default for selected sovereigns, assuming a default in Greece A or Portugal B , in simulations using the estimated model. See Section 5. The figure shows the change in the risk-neutral probability of default for selected sovereigns, assuming a default in Italy A or Spain B , in simulations using the estimated model.

Greece, Ireland, Portugal 2.