Recent empirical contributions show that emerging markets tend to issue mainly short-term debt, even if this increases the country's exposure to liquidity crises. This paper proposes a theoretical model to explain under which conditions issuing short-term debt can be the best choice for a country and its international lenders. Sovereign crisis management tools are then discussed to determine whether they can modify the optimal debt maturity structure. The optimal debt contract between a country and its lenders imposes a limit on the amount of long-term debt, which derives from the impossibility of the country to guarantee in advance that it will not dilute these obligations. Any change in the debt contract to include the possibility of sovereign debt restructuring and/or the intervention of an international institution has an impact on the cost of the issued debt; however, these crisis management tools are unable to loosen the constraint on long-term debt issuance.

In the main advanced economies the correlation between returns on stocks and government bonds was positive until the end of the 1990s, but became negative afterwards; the stock/bond correlation is relevant because it allows investors to diversify their portfolios and wipe out the corresponding aggregate risks. This work analyzes the determinants of the stock/bond correlation in Germany and the US. We use a theoretical model, borrowed from the macro-finance literature, where returns on bonds are determined by the real interest rate and inflation while returns on stocks are determined by the real interest rate, inflation and the dividend yield. The correlation between stocks and bonds is determined primarily by the variability of inflation and by the returns on stocks compared with those on bonds. Until the end of the 1990s, a positive value of the stock/bond correlation reflected the prevalence of supply shocks, largely due to increases in oil prices, which led to a countercyclical inflation trend: during recessions, as stock markets decrease, inflation rises inducing a decrease in government bond prices. From the early 2000s onwards, the stock/bond correlation has changed sign, becoming negative owing to the prevalence of procyclical inflation. During the last ten years, unconventional monetary policy measures have weakened the negative value of the correlation both in the US (in 2009-13) and Germany (in 2014-17).

This paper identifies the various channels that give rise to a “sovereign-bank nexus” whereby the financial health of banks and sovereigns is intertwined. We find that banks and sovereigns are linked by three interacting channels: banks hold large amounts of sovereign debt; banks are protected by government guarantees; and the health of banks and governments affect and is affected by economic activity. Evidence suggests that all three channels are relevant. The paper concludes with a discussion of the policy implications of these findings.

In this paper we propose a composite indicator that measures multidimensional sovereign bond market stress in the euro area as a whole and in individual euro area member states. It integrates measures of credit risk, volatility and liquidity at short-term and long-term bond maturities into a broad measure of sovereign market stress. The statistical framework builds on that of the ECB's Composite Indicator of Systemic Stress (CISS) developed by Hollo, Kremer and Lo Duca (2012), so that we call our metric the Composite Indicator of Systemic Sovereign Stress or \SovCISS". We implement the SovCISS for eleven euro area member states and also present four options of a SovCISS for the entire monetary union. In addition, we suggest a linear decomposition of the SovCISS, singling out contributions of the different components and of the time-varying correlations across these components. Comparing develoments in the SovCISS and the CISS over the crisis period clearly illustrates the usefulness of the latter for the real-time monitoring of systemic instabilities in the financial system as a whole. Finally, an application of the country-specific SovCISS indicators to the VAR-based spillover literature suggests that stress mainly originates from a few euro area countries, and that spillover patterns vary over time.

In this paper we study spillovers from bank to sovereign risk in the euro area using difference specifications around the European Central Bank's release of stress test results for 130 significant banks on October 26, 2014. We document that following this information release bank equity prices in stressed countries declined. Surprisingly, bank risk in stressed countries was not absorbed by their sovereigns but spilled over to non-stressed euro area sovereigns. As a result, in non-stressed countries, the co-movement between sovereign and bank risk increased. This suggests that market participants perceived that bank risk is shared within the euro area.

Local governments play a significant role in China’s public finance and fiscal operations. The size of local government debt has grown rapidly over the past years, exceeding the stock of sovereign debt in China. How does this development compare to other countries and what policies can foster the sound development of the bond markets? This paper finds that despite its rapid growth, the local government bond market is still underdeveloped. Severe impediments—low liquidity, weak credit discipline, structural fiscal deficit in local governments—have become more visible. Reforms to develop a sound local government bond market should harmonize tax and regulations, build liquidity, and advance fiscal reforms to tighten off-budget borrowing and address intergovernmental imbalances.

This paper examines the propagation of volatility and liquidity shocks across major sovereign bond markets during the euro area sovereign debt crisis. Spillovers are measured via a forecast error variance decomposition of a vector autoregressive model, which captures jointly the dynamics of liquidity and volatility in the government bond markets of Belgium, France, Germany, Italy, the Netherlands, and Spain. The model controls for common trends in sovereign credit risk, financial sector credit risk, funding conditions, aggregate default risk, and proxies for regional and global risk aversion. We show that liquidity is generally the more important source of shocks transmitted across borders, and this transmission largely originates from Italy and around the Italian crisis. Our findings highlight the importance of considering jointly liquidity and volatility dynamics in an analysis of spillovers beyond a traditional volatility spillover framework.

For multiple decades, activists have sought to institute an international legal regime that limits the ability of despotic governments to borrow money and then shift those obligations onto more democratic successor governments. Our goal in this article is to raise the possibility of an alternate legal path to raising the costs of borrowing for despotic regimes. All countries have systems of domestic laws that regulate agency relationships and try to deter corruption; otherwise the domestic economy would not function. Despotic governments, we conjecture, are especially likely to engage in transactions that are legally problematic. The reason being that despotic governments, by definition, lack the support of the populace; meaning that there is a high likelihood that actions that they take on behalf of the populace can be challenged as unrepresentative and contrary to the interests of the true principals. The foregoing conditions, if one translates them into the context of an ordinary principal-agent relationship, would constitute a voidable transaction in most modern legal systems. That means that if opposition parties in countries with despotic governments today were to monitor and make public the potential problems with debt issuances by their despotic rulers under their own local laws, it would raise the cost of capital for those despots. To support our argument, we use both the concrete example of the debt issuance shenanigans of the Maduro government in Venezuela and a more general analysis of the relationship between corruption, democracy and a nation’s borrowing costs.

This paper discusses the legal framework for sovereign debt restructuring in the Euro area – both de lege lata and de lege ferenda. Sovereign debt restructurings remain exceptional events that come with profound implications for financial stability and monetary policy transmission. However, they may be necessary as part of a financial assistance program to a euro area Member State, as was the case for Greece in 2012. This paper seeks to contribute to the ongoing discussion on how to enhance the functioning of the Economic and Monetary Union (EMU) by exploring the legal aspects of sovereign debt restructuring in the euro area. This includes an analysis on whether and how the procedures for sovereign debt restructuring in the euro area can be made more orderly, fair, and predictable by establishing a European Sovereign Debt Restructuring Framework (ESDRF). Drawing upon international standards for sovereign bond documentation, one may consider the inclusion of enhanced Collective Action Clauses (CACs) as well as certain technical amendment clauses. In addition, two options for a sovereign debt dispute resolution mechanism are discussed: (i) a separate chamber at the Court of Justice of the European Union (CJEU) and (ii) a sovereign debt arbitration mechanism. The paper makes no judgement on the economic or political feasibility and necessity for such changes, but seeks to shed some light on the legal aspects to be taken into account in the context of reforming the euro area’s framework for sovereign debt restructuring.

According to the results of H1 2018, the growth rates of revenues of consolidated budgets of constituent entities of the Russian Federation largely exceeded the current level of the rate of inflation, so, at year-end most regional and local budgets can expect growth in their real incomes. A recent decrease in the debt burden of the less well-off constituent entities is another evidence of the financial situation getting back to normal at the regional level.

In response to the global crisis a number of new institutional measures have been introduced in the fiscal framework, both on the UE and on the member states’ level, and the question is: have these measures provided better fiscal sustainability outcomes? We approach this question by looking at the evolution of fiscal sustainability in Poland, which is an interesting case of a member state that without significant market pressure (the only EU country without recession during the crisis) actively promoted several changes in the EU fiscal framework (e.g. 6-pack) and effectively internalized some of these key changes in its domestic fiscal policy, including a domestic expenditure fiscal rule. Our analysis reveals that the fiscal sustainability in Poland has significantly improved in the post-crisis period of 2009-2017: we detect both improvement of the fiscal sustainability parameters and structural breaks in the fiscal outcomes after the crisis. Namely, in comparison to the whole sample of 2004-2017 the strength of reaction of the primary deficit to a change of the public debt increased in the post-crisis time by nearly 50%. Importantly, these results are robust with respect to the pension fund reform which led to a one-off redemption of T-bonds in amount of 8.5% of GDP. The analysis also reveals a cycle of structural breaks of 2-and 4 years lags: for the output gap in 2008 Q4, for the primary deficit in 2010 Q4 and for the public debt in 2014 Q1. The case of Poland seems to suggest that the post-crisis EU fiscal measures can be effectively used to increase fiscal sustainability, if properly approached and internalized into the domestic fiscal framework. More research should be devoted to understanding the political and economic conditions under which such positive outcomes were possible.

Debt presents a dilemma to societies: successful societies benefit from a substantial infrastructure of consumer, commercial, corporate, and sovereign debt but debt can cause substantial private and social harm. Pre- and post-crisis solutions have seesawed between subsidizing and restricting debt, between leveraging and deleveraging. A consensus exists among governments and international financial institutions that financial stability is the fundamental normative principle underlying financial regulation. Financial stability, however, is insensitive to equality concerns and can produce morally impermissible aggregations in which the least advantaged in a society are made worse off. Solutions based only on financial stability can restrict debt without accounting for the risk of harm to persons least able to bear the risk, worsen pre-existing inequalities, destroy or impair the net worth of households, and impose unfavorable distributive consequences. This article offers a new approach to assist policymakers in developing and evaluating regulation to take criteria in addition to financial stability into account, but which do not undermine the aim of financial stability. It calls for a luck egalitarian approach, offering policymakers options to take the debtor’s choices into account while still accounting for cognitive mistakes people often make in debt decision making. It offers a general framework for the underlying principles for the regulation of debt: its focus is not on any particular forms of debt or its regulation but in structuring debt regulation more generally. It offers a set of recommendations on how regulators can take concerns about luck and equality into account in regulatory design.

In this paper we generalize endogenous growth models, which often assume a closed-economy, to allow for international borrowing and lending. We incorporate a prominent feature of global financial markets, that the marginal cost of borrowing facing a small open economy is dependent on the “country risk” as perceived by international lenders. This interest rate premium is determined by the ratio between debts and country assets that can be used for debt collateral. Consequently, the cost of credit is jointly influenced by international financial parameters and by endogenous country policies and growth patterns. To highlight the implications of integrating international financial considerations into an otherwise real growth model, we first use the simplest (and arguably, the most popular) one- factor growth model, the AK one, and assume that all real factors of production can be used as collateral. The model yields long-run conditions under which the country becomes a borrower in international markets, remains closed or accumulates financial wealth. The model highlights the special conditions corresponding to the solution to an AK growth model, but the outcomes of the model are richer and perhaps more realistic than conventional endogenous growth solutions. However, extending the model to include another reproducible, non-collateral asset allows for transitional dynamics but does not change the basic insights derived using the simple one-factor model.

In 2018 Russia continues to reduce, since the 2014–2015 crisis, its external debt. An additional factor contributing to the reduction of debt to non-residents is that non-residents have reduced their holdings of OFZ bonds over fears of new sanctions against Russia. Therefore the today’s level of external debt poses no threat to financial stability of the country.

This article describes the current sovereign debt crisis of Greece, Ireland, Portugal and Spain, (GIPS). Using data from the International Monetary Fund, IMF, we illustrate the degree of the problem since the start of 2009. Macroeconomic indicators such as gross domestic product constant prices as percent change, general government net lending/borrowing as percent of GDP, general government net debt as a percent of GDP, unemployment rate, general government revenue as percent of GDP, general government total expenditure as percent of GDP, current account balance as percent of GDP, inflation end of period consumer prices as percent change, total investment as percent of GDP, gross national savings as percent of GDP, volume of imports of goods and services as percent change, volume of exports of goods and services as percent change would be used to show the violations from the Maastricht Treaty which was signed in 1992. The debt, the deficit and the unemployment rate are the major problems among the EU countries.

In this paper we study how the co-movement of inflation and economic activity affects real interest rates and the likelihood of debt crises. First, we show that for advanced economies, periods with pro-cyclical inflation are associated with lower real interest rates. Pro-cyclical inflation implies that nominal bonds pay out more in bad times, making them a good hedge against aggregate risk. However, such pro-cyclicality also increases sovereign default risk when the economy deteriorates, since the government needs to make larger (real) payments. In order to evaluate both effects, we develop a model of sovereign default on domestic nominal debt with exogenous inflation risk and domestic risk-averse lenders. Countercyclical inflation is a substitute with default, while pro-cyclical inflation is a complement with it, by increasing default incentives. In good times, when default is unlikely, pro-cyclical inflation yields lower real rates. In bad times, as default becomes more material, pro-cyclical inflation can magnify default risk and trigger an increase in real rates.

In response to a request from the European Department, a Public-Sector Debt Statistics (PSDS) technical assistance (TA) mission was conducted in Chisinau during April 2–6, 2018. With the objective of improving Moldovan public sector debt statistics, the mission conducted an evaluation of data comprehensiveness in terms of: (i) institutional coverage; (ii) instrument coverage, including maturity structures; (iii) valuation of debt liabilities; and; (iv) additional fiscal risks resulting from contingent liabilities (on-lending and guarantees). Like the recent article IV mission1 and Public Finance Management (PFM) assessment,2 the mission found that Moldova continues to improve their recording, compilation and dissemination of public sector debt statistics reflecting potential fiscal risks, but faces five main statistical challenges going forward.

This paper explores how sovereign credit spreads vary with the level of governance. An analysis of 74 countries over the 2001–2016 period shows that sovereign credit default swap (CDS) spreads decrease with government effectiveness, particularly in countries exhibiting severe default risk, high indebtedness, and poor economic conditions. We formulate a theoretical explanation for these findings using a structural model in which governments adjust default and debt policies based on their abilities to collect and use fiscal revenues. The theory posits that more effective governments have less incentive to default and thus benefit from narrower credit spreads, although they may choose higher indebtedness levels.

As the multilateral debt relief initiatives draw to a close, this article reviews the impacts of debt relief to low-income countries (LICs) building on both the theoretical and empirical literature of past decades. We show that, while the pioneering studies of the early 2000s are inconclusive, the most recent analyses overcome certain methodological impediments to highlight significant multilateral debt relief initiative effects. These analyses hence suggest that these large-scale programmes may well have met expectations, at least in part.

Drawing on a newly compiled structural debt database, this article examines sovereign interest rate exposure in ten countries in Central, Eastern and Southeastern Europe (CESEE). The average maturity of sovereign debt has lengthened over time and converged across CESEE, indicating that the likelihood of sudden changes in interest rate has decreased since 2009. Using a simple theoretical model, this article identifies the drivers of this development, highlighting the role of debt managers’ risk preferences.