While there is a substantial body of literature on the effects of “debt overhang” on investment in heavily-indebted countries, there is surprisingly little empirical work available on this subject. This paper tests the hypothesis that the stock of foreign debt acts as a disincentive to private investment in the specific case of the Philippines. The empirical estimates provide support for this hypothesis, particularly after 1982. The estimates indicate that a $1.3 billion debt reduction (such as the one completed through the buyback operation in early 1990) would increase investment demand by something between one half and two percentage points of GNP.
This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.
High public debt often produces the drama of default and restructuring. But debt is also reduced through financial repression, a tax on bondholders and savers via negative or belowmarket real interest rates. After WWII, capital controls and regulatory restrictions created a captive audience for government debt, limiting tax-base erosion. Financial repression is most successful in liquidating debt when accompanied by inflation. For the advanced economies, real interest rates were negative 1⁄2 of the time during 1945–1980. Average annual interest expense savings for a 12—country sample range from about 1 to 5 percent of GDP for the full 1945–1980 period. We suggest that, once again, financial repression may be part of the toolkit deployed to cope with the most recent surge in public debt in advanced economies.
The global economy has experienced four waves of rapid debt accumulation over the past 50 years. The first three debt waves ended with financial crises in many emerging market and developing economies. During the current wave, which started in 2010, the increase in debt in these economies has already been larger, faster, and broader-based than in the previous three waves. Current low interest rates mitigate some of the risks associated with high debt. However, emerging market and developing economies are also confronted by weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood that the current debt wave will end in crisis and, if crises do take place, will alleviate their impact.
After the 2008 financial meltdown, the American crisis soon infected the European financial system, becoming both a sovereign debt crisis and a banking debacle in many peripheral Euro area countries. The European crisis spread quickly among closely integrated economies and the implementation of austerity policies reinforced a spiral of economic contractions and provoked a rising political rebellion. This World Economics Association book, edited by Victor Baker and Beniamino Moro, was written to address monetary, financial and debt issues, alongside the questions of social stabilization, strategies for structural reform and economic growth that may be re-considered to frame new economic perspectives for Europe. The call for reflection is persuasively made by the contributors: Jacques Sapir; Gerson Lima; Carmelo Ferlito; Merijn Knibbe; Enrico Marelli and Marcello Signorelli; Tom Vleeschhouwer and Tara Koning; Cristiano Boaventura Duarte and AndrE de Melo Modenesi; Dimitri B. Papadimitriou, Michalis Nukiforos and Gennaro Zezza. "The World Economics Association's on-line forums are an important step toward the goal of open exchange on policy questions among economists of diverse views world-wide. I congratulate Victor Beker and Beniamin Moro, who here bring together a set of important papers on the European question." James K. Galbraith, The University of Texas at Austin "The huge debates on the future of the European Union as well as the management of the Euro are among the hottest issues in both contemporary politics and finance. The papers in this volume offer a broad survey of the terrain and a broad menu of possible solutions. The authors and the World Economics Association have provided a major public service with this text of great interest for both the general public and for policymakers." Carlos Marichal, El Colegio de MExico "The European Union is suffering from many crises - and many self-inflicted through the structures of the Eurozone. This book is to be highly welcomed for debating the causes of those crises and seeking ways forward. The chapters here offer two contrasting routes away from the crisis of the Eurozone: radical reforms of the economic governance of EMU with creation of a viable monetary union, a sensible fiscal policy and building convergence or the orderly dismantaling of the euro and arrangements to co-ordinate currencies. These authors have set out agendas - when will the policy makers join the debates?" Malcolm Sawyer, University of Leeds, UK
We use micro data collected at the border and at retailers to characterize the effects brought by recent changes in US trade policy - particularly the tariffs placed on imports from China - on importers, consumers, and exporters. We start by documenting that the tariffs were almost fully passed through to total prices paid by importers, suggesting the tariffs' incidence has fallen largely on the United States. Since we estimate the response of prices to exchange rates to be far more muted, the recent depreciation of the Chinese renminbi is unlikely to alter this conclusion. Next, using product-level data from several large multi-national retailers, we demonstrate that the impact of the tariffs on retail prices is more mixed. Some affected product categories have seen sharp price increases, but the difference between affected and unaffected products is generally quite modest, suggesting that retail margins have fallen. These retailers' imports increased after the initial announcement of possible tariffs, but before their full implementation, so the intermediate passthrough of tariffs to their prices may not persist. Finally, in contrast to the case of foreign exporters facing US tariffs, we show that US exporters lowered their prices on goods subjected to foreign retaliatory tariffs compared to exports of non-targeted goods.
Why our addiction to debt caused the global financial crisis and is the root of our financial woes Adair Turner became chairman of Britain's Financial Services Authority just as the global financial crisis struck in 2008, and he played a leading role in redesigning global financial regulation. In this eye-opening book, he sets the record straight about what really caused the crisis. It didn’t happen because banks are too big to fail—our addiction to private debt is to blame. Between Debt and the Devil challenges the belief that we need credit growth to fuel economic growth, and that rising debt is okay as long as inflation remains low. In fact, most credit is not needed for economic growth—but it drives real estate booms and busts and leads to financial crisis and depression. Turner explains why public policy needs to manage the growth and allocation of credit creation, and why debt needs to be taxed as a form of economic pollution. Banks need far more capital, real estate lending must be restricted, and we need to tackle inequality and mitigate the relentless rise of real estate prices. Turner also debunks the big myth about fiat money—the erroneous notion that printing money will lead to harmful inflation. To escape the mess created by past policy errors, we sometimes need to monetize government debt and finance fiscal deficits with central-bank money. Between Debt and the Devil shows why we need to reject the assumptions that private credit is essential to growth and fiat money is inevitably dangerous. Each has its advantages, and each creates risks that public policy must consciously balance.
We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign default-banking crisis nexus.
The first major study to put the debt question in perspective, this book is the outcome of a historic conference held in May 2001 to debate Nigeria's future in the context of the debt overhang. The book captures the highlights of all presentations, and presents the recommendations and consensus reached concerning reducing the debt burden, strengthening the institutional framework for debt and resource management, and resuming sustainable development, ultimately demanding that Nigeria and the international community refocus their resources on fighting poverty.
