European Banks’ Sovereign Debt Home Bias: Voluntary or Involuntary?

Bálint Horváth, Harry Huizinga, Vasso P. Ioannidou 31 July 2015, voxeu

Bálint Horváth

PhD candidate, Tilburg University; and Junior Fellow, European Banking Center

Harry Huizinga

Professor of Economics and Chairman of the European Banking Centre, Tilburg University

Vasso P. Ioannidou

Professor of Finance, Lancaster University; Research Fellow and board member, European Banking Center; and Research Fellow, CEPR

When banks invest heavily in sovereign debt, and in domestic sovereign debt in particular, the result is a debt home bias. This column presents evidence of a partially voluntary and partially involuntary sovereign debt home bias among large European banks. This bias is stronger if the sovereign is risky and shareholder rights are strong or the government has a positive ownership in the bank. Also, banks with a strong home bias are valued positively by the stock market.

Banks’ exposure to sovereign debt potentially reinforces the negative feedback loop between weak public finances and financial instability in a country (Acharya et al. 2014). Moreover, bank holdings of sovereign debt may transmit public default risk in one country to other countries (Korte and Steffen 2014). These perils inherent in banks’ sovereign debt portfolios motivate a closer look at why banks invest heavily in sovereign debt and, particularly, in domestic sovereign debt, leading to a sovereign debt home bias.

Germany, Greece, and the Future of Europe

A wise and intelligent observation. Worth reading! (hfk)

JUL 20, 2015 3, Jeffrey Sachs, Project Syndicate

NEW YORK – I have been helping countries to overcome financial crises for 30 years, and have studied the economic crises of the twentieth century as background to my advisory work. In all crises, there is an inherent imbalance of power between creditor and debtor. Successful crisis management therefore depends on the creditor’s wisdom. In this regard, I strongly urge Germany to rethink its approach to Greece.

A financial crisis is caused by a country’s excessive indebtedness, which generally reflects a combination of mismanagement by the debtor country, over-optimism, corruption, and the poor judgment and weak incentives of creditor banks. Greece fits that bill.

Greece was heavily indebted when it joined the eurozone in 2001, with government debt at around 99% of GDP. As a new member, however, Greece was able to borrow easily from 2000 to 2008, and the debt-to-GDP ratio rose to 109%.

When a country’s prosperity depends on the continued inflow of capital, a sudden stop or reversal of financial flows triggers a sharp contraction. In Greece, the easy lending stopped with the 2008 global financial crisis. The economy shrunk by 18% from 2008 to 2011, and unemployment soared from 8% to 18%.

US-Ökonomen fordern den Austritt Deutschlands aus dem Euro

Deutsche Wirtschafts Nachrichten  |  Veröffentlicht: 19.07.15 01:02 Uhr |

Prominente US-Ökonomen sehen im Austritt Deutschlands die einzige Chance für die nachhaltige Lösung der Euro-Krise. Sie glauben, dass die Rückkehr zu D-Mark Deutschland und der Rest-Eurozone nützen würde. Mit Ben Bernanke hat sich auch der frühere Chef der US-Notenbank in diese Richtung geäußert. Die letzten Tabus in der Euro-Debatte fallen.

Führende US-Ökonomen sehen nicht Griechenland, sondern Deutschland als das größte Problem der Euro-Zone. So vertritt der Princeton-Ökonom Ashoka Mody die Auffassung, dass Deutschland der Euro-Zone schade, weil es sich weigere, „die Rolle eines Hegemons“ in Europa zu spielen. Deutschland habe vom Euro am meisten profitiert und schaffe wegen seiner wirtschaftlichen Stärke ein Ungleichgewicht.

The modern Greek tragedy

Jeremy Bulow, Kenneth Rogoff 10 June 2015, voxeu

Jeremy Bulow

Richard Stepp Professor of Economics at the Graduate School of Business, Stanford University

Kenneth Rogoff

Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard

 

 

The conventional wisdom in Greece is that the nation has suffered years of excessive, Troika-imposed austerity in a short-sighted effort to extract maximum repayment. This column argues that, in fact, Greece was a net receiver of Troika funds from 2010 to mid-2014, with a modest reverse flow since Greece stalled on its reforms. Both sides have negotiated in their self interest – influenced by bargaining threat points that have had everything to do with the direct costs of default and little to do with Greece’s concern about its reputation for making repayments.

A European nation with a proud heritage, Greece is nevertheless still an emerging market in many respects, and its economy has suffered the kind of epic depression that entrenched high-income countries have managed to avoid, even in the Great Contraction. Greece’s per capita GDP (in dollars), which had risen from 41% of German levels in 1995 to 71% in 2009, was back to 47% by 2014. On a purchasing power basis the decline was nearly as significant, from 77% of German levels in 2008 to 57% in 2013.

How the Eurozone Should Deal With Pushback

Date: 11-06-2015
Source: The Wall Street Journal By SIMON NIXON

A bold solution is needed to persuade unruly member states to undertake economic overhauls

Greek Prime Minister Alexis Tsipras has objected to measures that the country’s creditors have insisted upon in exchange for fresh aid.

Whatever the outcome of the interminable Greek crisis, it has highlighted a major challenge for the eurozone: How does it induce a member state to pursue policies vital not only to its own economic fortunes, but also to those of every other country to which it is yoked? How can sovereign governments—including those not facing the prospect of imminent default if they refuse to accept the conditions attached to a bailout program—be persuaded to undertake reforms that will make their economies more flexible and therefore better able to withstand shocks?

Greece, Ireland and Portugal: Three little piggies

Date: 19-02-2015
Source: The Economist

ON FEBRUARY 16th the Eurogroup, consisting of the euro-area’s 19 finance ministers, met to discuss whether they should change the conditions of Greece’s bail-out. Unsurprisingly, given that neither the German nor Greek governments were showing any sign of compromise over the weekend, the talks collapsed by the end of the afternoon. Wolfgang Schäuble, Germany’s finance minister, is strongly opposed to any modifications. So, ironically, are the governments of Ireland and Portugal. Like Greece, the latter two binged on cheap debt before the crisis, suffered banking meltdowns and were forced to endure the austerity that came as a condition of bail-outs of their own. But instead of standing in solidarity with Greece, they are mimicking the stance of its creditors.

It is easy for Ireland and Portugal to be fastidious: their economies have recently started to hum again (see chart). Over the past two years, economic growth has got going, unemployment has being falling and bond yields on their public debt are now lower than before the financial crisis. Indeed, at today’s meeting, Portugal’s finance minister attempted to repay some of its bail-out loans ahead of schedule.

Being Bad Europeans

The typical outsider in Krugman. I would wish he was right about France etc. (hfk)

Date: 01-12-2014
Source: Paul Krugman

The U.S. economy finally seems to be climbing out of the deep hole it entered during the global financial crisis. Unfortunately, Europe, the other epicenter of crisis, can’t say the same. Unemployment in the euro area is stalled at almost twice the U.S. level, while inflation is far below both the official target and outright deflation has become a looming risk.

Investors have taken notice: European interest rates have plunged, with German long-term bonds yielding just 0.7 percent. That’s the kind of yield we used to associate with Japanese deflation, and markets are indeed signaling that they expect Europe to experience its own lost decade.

Why is Europe in such dire straits? The conventional wisdom among European policy makers is that we’re looking at the price of irresponsibility: Some governments have failed to behave with the prudence a shared currency requires, choosing instead to pander to misguided voters and cling to failed economic doctrines. And if you ask me (and a number of other economists who have looked hard at the issue), this analysis is essentially right, except for one thing: They’ve got the identity of the bad actors wrong.

Irland: Vom Pleitestaat zu Europas Musterschüler

András Szigetvari, derstandard.at, 17. November 2014, 05:31

Die Anti-Krisen-Strategen der Eurozone haben endlich ein Vorzeigemodell gefunden: Irland, das am stärksten wachsende EU-Land. Aber es gibt Schönheitsfehler

Wien/Dublin – Die Idee ist spektakulär. Der Lobbyverband der britischen Transportunternehmen (CILT) schlug vergangene Woche den Bau eines Eisenbahntunnels zwischen Großbritannien und Irland vor. Für 19 Milliarden Euro wäre das 120 Kilometer lange Verbindungsstück zwischen Dublin und der Stadt Holyhead in Wales realisierbar. Für die britische Wirtschaft könnte die direkte Anbindung an die Nachbarinsel mehr Handel bringen und zu einem Wachstumsschub führen.

Das Bemerkenswerteste an dem Vorschlag: Niemand hat die CILT-Experten für verrückt erklärt. Einige Ökonomen haben die Idee aufgegriffen, in britischen Medien wurde der Plan seriös diskutiert.

Ein Wachstumsschub durch eine Anbindung an Irland? Wie sich die Zeiten ändern. Nach dem Kollaps der irischen Wirtschaft 2009 befand sich das Land lange im freien Fall. Die Arbeitslosigkeit erreichte Rekordwerte, die Staatsverschuldung explodierte. „Irland taumelt dem Kollaps entgegen“, war noch eine der zurückhaltenderen Schlagzeilen aus jener Zeit.

Gerade rechtzeitig

Panic money-printing won’t save the eurozone

By Liam Halligan, The Telegraph

12:35PM BST 18 Oct 2014

“It sounds far-fetched, I know,” I wrote in this column in December 2007. “But the ultimate victim of this subprime crisis could be nothing less than the single currency’s existence”.

Reading it today, the above statement seems pretty reasonable. Many mainstream analysts now recognise the huge stresses imposed by the ongoing credit crunch could yet see monetary union break up, with at least one country leaving. To argue otherwise, certainly in Anglo-Saxon company, is to risk appearing in denial.

After the eurozone’s successive summer bond crises of 2011 and 2012, it’s no longer particularly controversial to accept what we sceptics have been warning about for years; that the “irreversibility” of monetary union is merely a political slogan.

A peripheral member-state could indeed leave of its own accord, or be forced out, so escaping the straitjacket of a vastly overvalued currency. Another may then opt, or be asked, to follow. Saying so is now part of reasonable economic discourse, not necessarily the start of a row.

The first time I wrote the words that begin this article, though, getting on for seven years ago, the situation was rather different. Back then, only “xenophobes” “cranks” and “nutters” argued the eurozone might not survive. The subprime meltdown, moreover, was seen as “America’s crisis”, for most French, German (and even British) observers a problem most definitely made on Wall Street.

+++ Ifo-Chef Sinn kritisiert Stresstest als „zu zahm“ +++

handelsblatt.com, 26/10

Ifo-Präsident Hans-Werner Sinn kritisiert den Banken-Stresstest der EZB als „zu zahm“. „Die EZB hat es vermieden, ein Szenario der Deflation für Südeuropa durchzuspielen.“ Daher habe sie nur eine geringe Kapitallücke bei vielen Banken ausgemacht. „An einer Änderung der relativen Preise, die neben einer Inflation im Norden auch eine Deflation im Süden beinhaltet, kommt man aber nicht vorbei, wenn man die Wettbewerbsfähigkeit der Südländer ohne einen Anstieg des durchschnittlichen Preisniveaus im Euroraum wiederherstellen möchte,“ sagte Sinn