Sovereign Debt Crisis Research Paper
www.newyorkfed.org/research/current_issues
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Volume 17, Number 5
IN ECONOMICS AND FINANCE
current issues
FEDERAL RESERVE BANK OF NEW YORK
Saving Imbalances and the Euro Area
Sovereign Debt Crisis
Matthew Higgins and Thomas Klitgaard
For several years prior to 2010, countries in the euro area periphery engaged in heavy borrowing from foreign private investors, allowing domestic spending to outpace incomes.
Now these countries face debt crises reflecting a loss of investor confidence in the sustainability of their finances. The result has been an abrupt halt in private foreign lending to these economies.
This study explains how the periphery countries became dependent on foreign borrowing and considers the challenges
they …show more content…
Again, it is too early to judge whether these short-term adjustments in the euro area periphery countries augur an improved productivity trend. The challenge going forward will be to ensure that productivity gains come from innovation and business reorganization, and not merely from shedding workers. In the best case, productivity-driven gains in foreign market share would leave the export sector as an important source of employment growth. Similarly, productivity gains in importcompeting industries could support employment by shifting demand from goods and services purchased from abroad to goods and services produced by workers at home.
The scale of the adjustment challenge in the periphery countries will be in part determined by the pace of growth in export markets. Domestic incomes can rise relative to domestic demand even without improved competitiveness given a favorable external environment. For example, Greece’s real exports rose by some 44 percent over the 1999-2007 period even as the country suffered major losses in export market share. An increase in external demand would materially ease the periphery …show more content…
German banks have offset the inflow of surplus reserves by reducing their borrowings from the Bundesbank.
The risk to the Eurosystem from cross-border imbalances depends on the quality of the collateral posted in refinancing operations. In accordance with Eurosystem rules, central banks book collateral at current market value, with local commercial banks subject to margin calls to offset any loss in value.
In addition, substantial haircuts are applied to lower rated securities. Any losses would be shared by the Eurosystem as a whole rather than by creditor central banks. The Bundesbank, for example, would bear roughly 27 percent of any losses, in line with its share in the Eurosystem. A key exception concerns commercial bank reserves created in Ireland through the
Emergency Liquidity Assistance program. The credit risk for the estimated !54 billion outstanding under the program rests with Ireland’s central bank.
Eurosystem credit to periphery banking systems has helped to make ongoing current account deficits in those countries easier to finance. There is no direct correspondence
✦
Volume 17, Number 5
IN ECONOMICS AND FINANCE
current issues
FEDERAL RESERVE BANK OF NEW YORK
Saving Imbalances and the Euro Area
Sovereign Debt Crisis
Matthew Higgins and Thomas Klitgaard
For several years prior to 2010, countries in the euro area periphery engaged in heavy borrowing from foreign private investors, allowing domestic spending to outpace incomes.
Now these countries face debt crises reflecting a loss of investor confidence in the sustainability of their finances. The result has been an abrupt halt in private foreign lending to these economies.
This study explains how the periphery countries became dependent on foreign borrowing and considers the challenges
they …show more content…
Again, it is too early to judge whether these short-term adjustments in the euro area periphery countries augur an improved productivity trend. The challenge going forward will be to ensure that productivity gains come from innovation and business reorganization, and not merely from shedding workers. In the best case, productivity-driven gains in foreign market share would leave the export sector as an important source of employment growth. Similarly, productivity gains in importcompeting industries could support employment by shifting demand from goods and services purchased from abroad to goods and services produced by workers at home.
The scale of the adjustment challenge in the periphery countries will be in part determined by the pace of growth in export markets. Domestic incomes can rise relative to domestic demand even without improved competitiveness given a favorable external environment. For example, Greece’s real exports rose by some 44 percent over the 1999-2007 period even as the country suffered major losses in export market share. An increase in external demand would materially ease the periphery …show more content…
German banks have offset the inflow of surplus reserves by reducing their borrowings from the Bundesbank.
The risk to the Eurosystem from cross-border imbalances depends on the quality of the collateral posted in refinancing operations. In accordance with Eurosystem rules, central banks book collateral at current market value, with local commercial banks subject to margin calls to offset any loss in value.
In addition, substantial haircuts are applied to lower rated securities. Any losses would be shared by the Eurosystem as a whole rather than by creditor central banks. The Bundesbank, for example, would bear roughly 27 percent of any losses, in line with its share in the Eurosystem. A key exception concerns commercial bank reserves created in Ireland through the
Emergency Liquidity Assistance program. The credit risk for the estimated !54 billion outstanding under the program rests with Ireland’s central bank.
Eurosystem credit to periphery banking systems has helped to make ongoing current account deficits in those countries easier to finance. There is no direct correspondence