the economics of sovereign debt, bailouts and the …...discussion of \the economics of sovereign...
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![Page 1: The Economics of Sovereign Debt, Bailouts and the …...Discussion of \The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis" by Gourinchas, Martin and Messer NBER IFM,](https://reader030.vdocument.in/reader030/viewer/2022040904/5e781148e754e572ff7e9444/html5/thumbnails/1.jpg)
Discussion of “The Economics of Sovereign
Debt, Bailouts and the Eurozone Crisis”
by Gourinchas, Martin and Messer
NBER IFM, Fall Meetings 2018
Javier Bianchi
Minneapolis Fed & NBER
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Overview
• Simple, yet rich model of sovereign default with bailoutpolicies applied to Eurozone:
• Spillovers of default to other countries
• International bailouts:
• Transfers vs. inflation
• Ex ante vs. ex post
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Summary of the Model
• Greece starts with some debt. May want to borrow but
cannot commit to repay.
• If Greece defaults, Germany’s real economy contracts
⇒ Incentives to bailout Greece ex post and avoid default
• Everyone knows ex-ante that bailout will take place
⇒ Creditors willing to lend at lower rate. Higher borrowing
and higher default probability
A key result: Even if Germany could commit, bailouts are not
necessarily eliminated
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Summary of the Model
• Greece starts with some debt. May want to borrow but
cannot commit to repay.
• If Greece defaults, Germany’s real economy contracts
⇒ Incentives to bailout Greece ex post and avoid default
• Everyone knows ex-ante that bailout will take place
⇒ Creditors willing to lend at lower rate. Higher borrowing
and higher default probability
A key result: Even if Germany could commit, bailouts are not
necessarily eliminated
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Final Period: Values of Repayment & Default
Government defaults if debt = B1
B
V
VD
VR
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Final Period: Values of Repayment & Default
Government defaults if debt = B1
B
V
B1
VD
VR
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Bailout makes govt. indiff. between R and D.
Consider a transfer contingent on repayment
B
V
B̃0
τ
VD
VR
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Bailout makes govt. indiff. between R and D.
Greece not better-off ⇒ Southern view
B
V
B̃0
τ
VD
VR
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Initial Period: Government Can Borrow at Lower Rate
Greece �, creditors v & Germans worse-off. ⇒ North view
B
V
VD
VR V ′R(τ e)
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Initial Period: Government Can Borrow at Lower Rate
Greece �, creditors v & Germans worse-off. ⇒ North view
B
V
VD
VR V ′R(τ e)
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If initial debt is low...
Greece �, creditors v & Germans worse-off.⇒ North view
B
V
B0
VD
VR V ′R(τ e)
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If initial debt is high...
Expected transfer avoids default ⇒ All gain
B
V
B0 B̃0
VD
VR V ′R(τ e)
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Source of Spillover?
• Model assumes that when Greece defaults, Germany faces
exogenously lower output
• Interpretation is that there is a disruption in economic activity
because of interlinkages typical of a monetary union.
Comment
• Exact source could matter for policy implications.
• If spillover is due to German banks holding Greek bonds
...more desirable for Germany to bailout own banks.
• If spillover is that Spanish spreads go up because investorsupdate beliefs about future EU bailouts
...not necessarily a true cost
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Source of Spillover?
• Model assumes that when Greece defaults, Germany faces
exogenously lower output
• Interpretation is that there is a disruption in economic activity
because of interlinkages typical of a monetary union.
Comment
• Exact source could matter for policy implications.
• If spillover is due to German banks holding Greek bonds
...more desirable for Germany to bailout own banks.
• If spillover is that Spanish spreads go up because investorsupdate beliefs about future EU bailouts
...not necessarily a true cost
9/13
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Bailout through inflation or transfers?
• Result in the paper is that EU uses first transfers, then
inflation
• This is an ex-post result
• Ex ante: Transfers are more targeted than inflation ⇒ more
moral hazard ex-ante
• Does ex ante analysis reverse pecking order?
Another possibility: more stimulative monetary policy. Debt is paid
in full ⇒ avoids moral hazard
• Stimulative monetary policy can help avoid rollover crisis
(Bianchi & Mondragon, 2018)
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Bailout through inflation or transfers?
• Result in the paper is that EU uses first transfers, then
inflation
• This is an ex-post result
• Ex ante: Transfers are more targeted than inflation ⇒ more
moral hazard ex-ante
• Does ex ante analysis reverse pecking order?
Another possibility: more stimulative monetary policy. Debt is paid
in full ⇒ avoids moral hazard
• Stimulative monetary policy can help avoid rollover crisis
(Bianchi & Mondragon, 2018)
10/13
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Bailout through inflation or transfers?
• Result in the paper is that EU uses first transfers, then
inflation
• This is an ex-post result
• Ex ante: Transfers are more targeted than inflation ⇒ more
moral hazard ex-ante
• Does ex ante analysis reverse pecking order?
Another possibility: more stimulative monetary policy. Debt is paid
in full ⇒ avoids moral hazard
• Stimulative monetary policy can help avoid rollover crisis
(Bianchi & Mondragon, 2018)
10/13
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Bailout through inflation or transfers?
• Result in the paper is that EU uses first transfers, then
inflation
• This is an ex-post result
• Ex ante: Transfers are more targeted than inflation ⇒ more
moral hazard ex-ante
• Does ex ante analysis reverse pecking order?
Another possibility: more stimulative monetary policy. Debt is paid
in full ⇒ avoids moral hazard
• Stimulative monetary policy can help avoid rollover crisis
(Bianchi & Mondragon, 2018)
10/13
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Ex ante welfare effects of bailouts
• A key mechanism of the paper: a future bailout can avoid
default today and improve welfare “ex ante”.
• Question: If initial debt is very low, can a future bailout still
improve welfare?
• In particular, room for Pareto improvements if government is
charged an initial fee?
• Transfer can be made conditional on repayment & income
shocks
• Departures from Aguiar, Amador, Hopenhayn and Werning
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Ex ante welfare effects of bailouts
• A key mechanism of the paper: a future bailout can avoid
default today and improve welfare “ex ante”.
• Question: If initial debt is very low, can a future bailout still
improve welfare?
• In particular, room for Pareto improvements if government is
charged an initial fee?
• Transfer can be made conditional on repayment & income
shocks
• Departures from Aguiar, Amador, Hopenhayn and Werning
11/13
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Measuring the bailout
• Key issue is what is the “right” interest rate adjusted by risk
• A common approach is to consider the market rate but default
risk might be lower than market bonds
• Paper benchmarks with IMF loans (Zettelmeyer-Joshi 2005)
• Bailout proportional to difference between IMF and EU loans
• Argument that this is a lower bound
Comments:
• What about “transfers” to/from junior creditors? Do bailoutslower or raise spreads of market bonds?
• Effects possibly heterogeneous depending on maturity and risk
of a rollover crisis
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Final Remarks
• Very nice theoretical framework with a key policy takeaway:
removing “no-bailout clause” can exacerbate crisis
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