Unlocked handcuffs

The above figure, from a fascinating new IMF Working Paper* on sovereign debt restructuring, shows the breakdown of recent EU country public bond issuance by the governing law of the bond contract. Economics has various concepts of the usefulness of tying one’s hands to gain credibility, such as for example by committing to a single currency following a history of high inflation and devaluations. So perhaps the most interesting thing about this chart is that it shows despite the presumed sanctity of sovereign bonds above all other forms of debt, European countries have generally not chained themselves to the (external) mast in terms of governing law. Most countries issue government debt under their own law, meaning that changing the terms of the debt could be accomplished legislatively at any time. This is in contrast to commercial bonds: note that one of Ireland’s rationale’s for servicing unsecured debt in insolvent banks was that the bonds were issued under English law.

Now, as the chart shows, it’s not always true that European Union countries issue public bonds governed by domestic law. If there’s a rough trend in the data, it’s for small and mostly non-Eurozone countries to issue under English law, perhaps in search of the credibility or good signal of such a framework.  But for the rest of them, its sovereign debt and we’re not even supposed to discuss default and they’ve pinky-promised that they’ll pay it back. But legally, they could rewrite the terms in the morning.

*Sovereign Debt Restructurings 1950 – 2010: Literature Survey, Data, and Stylized Facts. Das, Papaioannou, & Trebesch, IMF WP 12/203, 2012.

In Search Of Lost Demand

So here’s the 5 trillion dollar trick question. In an interesting article on the limitations of central bank monetary policy in the current environment, Reuter’s Alan Wheatly made the following statement which caught my attention. “Central banks are rummaging through their toolkits because, despite slashing interest rates and buying vast quantities of bonds, they have signally failed to revive a global economy hamstrung by heavy debts and weak banks”. But thinking about it for a couple of minutes, you could ask yourself why is this so? Continue reading

The Owl Of Minerva

Last week was the fifth anniversary of the outbreak of the global financial crisis. Not uncoincidentally it was also the fifth anniversary of continually rising unemployment in Spain , since it was in early summer 2007 that seasonally adjusted Spanish unemployment embarked on its steady upward path. And after it started climbing, naturally it hasn’t stopped since. Indeed we seem to have at least another year of growing unemployment before us, maybe more.

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Is The Italian Elephant About To Break Loose Again?

Market nervousness about Italy has been growing in recent weeks, with the Moody’s credit downgrade of the country being only  one of the reasons. A bailout is clearly in the offing, with the only real questions being how and when. While the situation inside his country appears to be deteriorating, Mario Monti has been doing the rounds of European capitals in an attempt to drum up support. While in Helsinki he raised an eyebrow or two when he warned that without a serious plan to bring down interest rates disaffection with the euro in his country could easily grow to dangerous proportions. Crying wolf, or a piece of insider information? Probably a bit of both. Continue reading