The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis by P.O. Gourinchas and Philippe Martin

Transcription

1 The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis by P.O. Gourinchas and Philippe Martin Alberto Martin CRE, UPF, Barcelona GSE, MF June 23, 2015 Martin (CRE, UPF, Barcelona GSE, MF) Conference on the Economics of Sovereign Debt June 23, / 14

2 Overview Motivation how to deal with sovereign debt crises in a monetary union? Two big themes e ects of intra-union transfers: ex ante and ex post e ects of debt monetization: ex ante and ex post two bailouts technologies: how should they be used/combined Martin (CRE, UPF, Barcelona GSE, MF) Conference on the Economics of Sovereign Debt June 23, / 14

3 Model: ingredients Two-period model Three countries, with representative consumer and government taly and Germany: union ROW All countries have initial debt b 0 and receive endowments y 1, y 2 Asset market: sovereign debt At t = 0, issued by governments F bought by consumers of country j U j = c j 0 + βe hc j 1 i + ω j λ s ln b s,j 1 + ω j λ i,j ln b i,j 1 At t = 1, governments decide whether to repay or default Martin (CRE, UPF, Barcelona GSE, MF) Conference on the Economics of Sovereign Debt June 23, / 14

4 Debito a la taliana taly is the driving force of the model high b0 stochastic y1 F may give rise to high b 1 and default mplications of default: taly loses fraction Φ of output Germany loses fraction κ of output Martin (CRE, UPF, Barcelona GSE, MF) Conference on the Economics of Sovereign Debt June 23, / 14

5 Role of transfers Ex post taly does not fully internalize costs of default e cient for Germany to provide transfer F Ex ante Germany captures ex post surplus risk-shifting: taly issues too much debt Ex ante, does Germany set prob. of transfer to zero? not necessarily might push taly to default at t = 0: losses on Germany authors interpretation: F Germany did not fully eliminate possibility of bailouts to prevent costly defaults of highly indebted union members Martin (CRE, UPF, Barcelona GSE, MF) Conference on the Economics of Sovereign Debt June 23, / 14

6 Cost of default (taly) Benefit of default (taly)

7 Cost of default (taly) Benefit of default (taly) DEFAULT REPAY

8 Cost of default

9 Cost of default Benefit of default

10 Cost of default Benefit of default

11 Cost of default Benefit of default

12 Cost of default Optimal transfer Benefit of default

13 Optimal transfer

14 Role of transfers Ex post taly does not fully internalize costs of default e cient for Germany to provide transfer F Ex ante Germany captures ex post surplus risk-shifting: taly issues too much debt Ex ante, does Germany set prob. of transfer to zero? not necessarily might push taly to default at t = 0: losses on Germany authors interpretation: F Germany did not fully eliminate possibility of bailouts to prevent costly defaults of highly indebted union members Martin (CRE, UPF, Barcelona GSE, MF) Conference on the Economics of Sovereign Debt June 23, / 14

15 Debt monetization Tax on debt repayment t < t: applies to taly and Germany reduces debt burden wrt ROW union-wide loss of output: δ y1 < Φ y 1 At t = 1: Germany chooses transfer (contingent on repayment) ECB choses in ation (contingent on repayment) taly decides whether or not to repay Martin (CRE, UPF, Barcelona GSE, MF) Conference on the Economics of Sovereign Debt June 23, / 14

16 Debt monetization Ex post With transfers: monetization ex post e cient F reduces transfers and instances of default Without transfers: monetization ex post constrained e cient F although costly, used to avoid default Ex ante (in progress) monetization " in ation risk and # German transfers: # talian debt monetization # default risk and " German transfers: " talian debt Martin (CRE, UPF, Barcelona GSE, MF) Conference on the Economics of Sovereign Debt June 23, / 14

17 Cost of default Benefit of default

18 Cost of default Cost of inflation Benefit of inflation

19 Cost of default Cost of inflation Benefit of inflation REPAY W/TRANSFERS AND MONETZATON REPAY W/TRANSFERS

20 Optimal transfer

21 Cost of default Cost of inflation Benefit of inflation NO TRANSFERS: MONETZATON STARTS HERE

22 Debt monetization Ex post With transfers: monetization ex post e cient F reduces transfers and instances of default Without transfers: monetization ex post constrained e cient F although costly, used to avoid default Ex ante (in progress) monetization " in ation risk and # German transfers: # talian debt monetization # default risk and " German transfers: " talian debt Martin (CRE, UPF, Barcelona GSE, MF) Conference on the Economics of Sovereign Debt June 23, / 14

23 Comment : environment Bonds in the utility function U j = c j 0 + βe hc j 1 i + ω j λ s ln b s,j 1 + ω j λ i,j ln b i,j 1 liquidity services used to pin down portfolios What are these liquidity services? why are these independent of the bonds risk of default? why don t they change with the state of the economy? Fluctuations in bond portolios: major aspect of recent crisis Broner, Erce, Martin, Ventura (2014), Brutti and Saure (2015) Martin (CRE, UPF, Barcelona GSE, MF) Conference on the Economics of Sovereign Debt June 23, / 14

24 Figure 2. Domestic and sovereign exposures of Euro area banks Notes: The sample comprises 247 banks from Eurozone countries. Sovereign exposures are expressed in percent of total bank assets. Sources: ECB ndividual MF Balance Sheet Statistics, Bankscope.

25 Figure 3. Domestic exposures of banks in Eurozone core vs. periphery countries 8% 7% 6% 5% 4% 3% 2% 1% Periphery countries Core countries 0% Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Notes: The sample comprises 247 banks from Eurozone countries. Periphery countries include Greece, taly, reland, Portugal, and Spain. Core countries include Austria, Belgium, Finland, France, Germany, Luxembourg, and The Netherlands. Sovereign exposures are in percent of total bank assets. Sources: ECB ndividual MF Balance Sheet Statistics, Bankscope.

26 Comment : environment Bondholdings driven by liquidity risk-taking: correlated risks, bank bailouts, regulation, etc... nancial repression Transfers and monetization may have very di erent e ects on portfolios Example: collective moral hazard German holdings of talian bonds vs. German bailouts Martin (CRE, UPF, Barcelona GSE, MF) Conference on the Economics of Sovereign Debt June 23, / 14

27 Comment : costs of default / transfers Main result: eliminating bailouts may not be optimal ex ante otherwise, taly defaults and imposes costs But how large are these costs before integration? let taly default, then integrate Alternatively, isn t it more e cient to provide lump-sum transfer at t = 0 Martin (CRE, UPF, Barcelona GSE, MF) Conference on the Economics of Sovereign Debt June 23, / 14

28 Comment : monetization Main result: eliminating bailouts ex ante: may lead to ine cient in ation ex post however, in ation does not lead to risk-shifting ex ante Unclear net e ect More general question suppose union has to choose among two bailout technologies F F di er in ex post e ciency but...most e cient one ex post generates more risk shifting ex ante which one is best? Martin (CRE, UPF, Barcelona GSE, MF) Conference on the Economics of Sovereign Debt June 23, / 14

29 Conclusion Simple but rich model Bondholdings are perhaps weakest point nteresting interaction between bailouts and monetization perhaps frame it in terms of bailout technology Look forward to reading the next version Martin (CRE, UPF, Barcelona GSE, MF) Conference on the Economics of Sovereign Debt June 23, / 14