...The Political Economy of the Greek Debt Crisis: A Tale of Two Bailouts Silvia Ardagna and Francesco Caselli First draft: February 2012; Final version: January 2014 Abstract We review the events that led to the May 2010 and July 2011 bailout agreements. We interpret the bailouts as outcomes of political-economy equilibria. We argue that these equilibria were likely not on the Pareto frontier, and sketch political-economy arguments for why collective policy making in the Euro area may lead to suboptimal outcomes. Most modern sovereign debt crises have been managed in Washington, DC, through the combined e¤orts of the International Monetary Fund (IMF) and the US government. A distinctive feature of the crisis that has engulfed European sovereign-debt markets since the fall of 2009 has been that the IMF has played only a supporting (albeit important) role, while the management of the crisis has been driven by European institutions: the council of …nance ministers (ECOFIN), the European Council (EC, made up by all the heads of government of the European Union) and the European Central Bank (ECB). To the extent that the IMF is largely a technocratic institution (though of course not entirely immune from political in‡ uence) while ECOFIN and the EC are made up of politicians, one may expect the management of the crisis by the EC to be more a¤ected by electoral concerns. Furthermore, since there are 27 members to the EC, representing countries with potentially di¤erent interests, one...
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...government. It encompasses public debt owed by the federal government, the state government, and even the municipal and local government. Public debt accrues over time when the government spends more money than it collects in taxation. As government engage in more deficit spending, the amount of public debt increases. Public debt can either be: 1.1External debt 1.2Domestic debt or Internal Debt 1.1External debt: Public debt can be made up of all sorts of different types of debt. A great deal of public debt is external debt, which is money that is owed by the government to foreign lenders, either in the form of international organizations, other governments, or groups like sovereign wealth funds which invest in government bonds 1.2Domestic debt or Internal Debt: Public debt is also made up of internal debt, where citizens and groups within the country lend the government money to continue operating. In some ways, this is a lot like lending to oneself, since ultimately the responsibility for public debt falls back on the very people lending money. 2.0Benefits of Public Debt * It is an alternative for financing fiscal budget deficit * Deficit budget raise the recession and public borrowing help the economy not to be fall in recession * Public debt refers to the current outstanding obligations for which the Central Government and its branches are responsible. Simply, public debt means borrowing by the Central Government...
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...plausible scenario for Eurozone fragmentation in 2012 would see elections in Greece, France, Finland and probably Italy changing the terms of the debate to reflect frustration with economies in recession, rising unemployment and hostility to proposed or actual austerity measures. In this scenario, Greece receives an irregular rescue from the European Financial Stability Facility (EFSF) and negotiates a rescheduling of its debt in March. But once its April elections are over, the new Greek government is unable to secure bailout funds having missed austerity and reform targets, prompting a formal sovereign default. Greece announces its withdrawal from the Eurozone, closing its banking sector for a period, freezing euro denominated accounts and redenominating them as newly created drachmas. The French and German governments nationalise their weakest banks most exposed to sovereign nonpayment by Greece. This increases their own national debts and prompts a second round of downgrades to the ratings of the French government and the EFSF (following earlier downgrades in...
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...| Effects of changes in sovereign credit ratings on investors’ behavior | | | | | University: University Utrecht, the Netherlands Author: A.D. Hollaar Project-Coordinator: J.H.J.Lukkezen Course-Coordinator: dr. C. Remery Course: Applied Economics Research Course Date: 13th of November, 2011 University: University Utrecht, the Netherlands Author: A.D. Hollaar Project-Coordinator: J.H.J.Lukkezen Course-Coordinator: dr. C. Remery Course: Applied Economics Research Course Date: 13th of November, 2011 Table of Contents Abstract 2 Introduction 3 Section I: Theory 5 1.1 Sovereign bonds and credit rating agencies 5 1.2 Measures for investors behavior 6 1.3 Expected behavior of investors 11 1.4 Related literature 15 1.5 Models 16 Section II: Data & Stylized facts 17 2.1 Data 17 2.2 Stylized facts 20 Section III: Empirical analyses 26 3.1 Effect of rating events on investors’ behavior 27 3.2 Effect of business cycles on investors’ behavior surrounding rating events 33 Conclusion 46 Reference list 48 Appendix 52 Section I: Rating symbols & definitions 52 Section II: Tables 54 Section III: Figures 56 Section IV: Extended theory 57 Section V: Graphs 59 Section VI: Data 67 Section VII: Testing classical assumptions 71 Abstract Firstly, this paper investigates if investors react to changes in sovereign credit ratings. Hereby rating changes for European, Non-European and European Union countries...
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...to International Bond Portfolio Management (IBPM) Credit risk essentially pertains to a bond holder in a case where the holder obtains a risk of not receiving coupon or principal payments. There are many types of counterparties, from individuals to sovereign governments and a variation of obligations in the form of corporate bond holdings, non- sovereign, or sovereign debts, from auto loans to derivative transactions and is correlated on an international scale. Market discriminations of decreasing credit risk value or an increase in market risk abhorrence can inevitably lead to a decrease in in a bond’s price (Przybylinski, 2012: pg.6). Volatility of the portfolio is then effectively increased and therefore a decrease in returns. Investors often use credit ratings provided by rating agencies, which have been highly criticized ever since the 2008 US Financial crisis (Ryan,2012:3), such as Standard & Poor’s, Moody and Fitch in order to measure credit risks of viable bonds. These ratings mostly apply to corporate bonds as the demand for sovereign bonds are not as prevalent which is also contributed to the fact that sovereign bonds are not easy to compare as non-sovereign bonds. Table 1 below clearly indicates the ratings of sovereign bonds of various countries with ratings of May 2010. As one can see, the European sovereign bonds have a dissimilar rating as oppose to the markets, especially since Europe is experiencing a financial crisis. European sovereigns appear cheap according...
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...Asymmetric Shocks, Long-term Bonds and Sovereign Default1 Junjun Zhu, Shiyu Xie School of Economics, Fudan University January 2011 Abstract: We present a sovereign default model with asymmetric shocks and long-term bonds, and solve the model using discrete state dynamic programming. As result, our model matches the Argentinean economy over period 1993Q1-2001Q4 quite well. We show that our model can match high default frequency, high debt/output ratio and other cyclical features, such as countercyclical interest rate and trade balance in emerging countries. Moreover, with asymmetric shocks we are able to match high sovereign spread level and low spread volatility simultaneously in one model, which is till now not well solved. As another contribution of our paper, we propose a simulation-based approach to approximate transition function of output shocks between finite states, which is an indispensable step in discrete state dynamic programming. Comparing to Tauchen’s method, our approach is very flexible in transforming various econometric models to finite state transition function, so that our approach can be widely used in simulating different kinds of discrete state shocks. JEL Classification: E44, F32, F34 Keywords: Sovereign Default, Asymmetric Shocks, Transition Function, Long-term Bonds 1 Corresponding authors: Junjun Zhu, Ph.D candidate at School of Economics, Fudan University, No. 200 Guoquan Road, Shanghai 200433, China. Shiyu Xie, professor at School of Economics...
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...University of Phoenix Material Week Four Individual Assignment: Financial Transaction Risks Describe the risk exposure(s) in the following financial transactions. Identify which transactions are influenced by interest rates or interest income. (CAUTION: Some can be influenced by both!) Risk Types: Interest rate risk, Credit risk, Technology risk, Foreign exchange rate risk, Country or sovereign risk |Financial Transactions |Risk Type |Describe and justify risk type |Interest Rate or | | | | |Interest Income? | |A bank finances a $10 million, six-year fixed-rate commercial loan by selling one-year |Interest & Credit |This type of financial transaction it has an interest rate |Both, Interest Rate and| |certificate of deposit. |Risk |risk and credit risk. The reason it is an interest rate risk |Interest Income | | | |is because changes in an interest rate can change the value | | | ...
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...sold at market prices to Conoco under a DuPont-guaranteed off-take agreement. At the end of this 35-year purchasing agreement, Conoco will transfer its shares to Maraven at no cost. The sponsors agreed to use 40% of equity (40%) and 60% of debt to finance the project’s $2.425 billion total cost. The financial advisors, Citicorp and Credit Suisse First Boston, used a multi-pronged financing strategy to raise debt from commercial banks, development agencies, and bond investors. In the end, the sponsors raised $450 million in bank finance and $1 billion in Rule 144A bonds, all of which was non-recourse to the sponsors following completion of the project. The decision to finance this deal on a project basis was actually a dual decision regarding both financial and organizational structure. Risks analysis The purpose of this paper is to analyze how the sponsors allocated both contractual and residual risk in the Petrozuata deal. There are four general categories of risk: precompletion risks, operating risks, sovereign risks, and financing risks, but in this paper I will talk just about the last two risks, as being principal part of my contribution to the group case analysis, so here I am going to present the information found that I used while...
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...generally defined as „providers of opinions about the creditworthiness of companies and countries which have become very important players in financial markets due to growth in Capital Markets, Credit Derivative Markets, Globalisation of Capital Markets; and an increase in Regulatory Use of Ratings” (Ryan, 2012). Here comes the question: Why actually they have become very important players globally? CRAs are companies who assign credit ratings for the debt of public and private companies who are issuers of certain types of debt obligations and also CRAs assign credit ratings for debt instruments themselves. Usually the issuers of securities are companies, governments, NGOs and entities with special purposes or national governments issuing bonds that can be traded on a secondary market. The main important thing is that depending on the given credit rating, CRAs in fact affect the interest rate applied to a particular issued security, because it is perceived that CRAs take into consideration the issuer's ability to pay back debt/loan. Who needs these entire credit ratings one would ask… – they are used by investors,...
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...Università degli studi di torino | Rating agencies and financial speculation | An analysis of the protagonists of the world market | | Elisa Valenti | Matricola 711323 | | INDEX The protagonists of the world market | 2 | A particular source of power: rating agencies and country rating | 2 | Conflict of interest? | 4 | Other issues of concern * Barriers to entry and lack of competition * Transparency | 555 | The importance of reputation | 6 | What went wrong? | 7 | The need for regulation | 7 | Can we trust the rating agencies? * The Enron Case Study * The Parmalat Case Study | 889 | Are rating agencies guilty? | 12 | The sinister power of rating agencies | 13 | A world without rating agencies | 14 | Conclusions | 15 | References | 16 | The protagonists of the world market A rating agency is a private firm which publicly evaluates a company capacity to repay the debt issued. This capacity is classified using a scale that goes from a maximum of AAA and a minimum of DDD. Obviously the evaluation received influences the interests that a company has to pay to receive credit. Today the rating market is controlled by three giants, the so called “three sisters”: Moody’s Investor Service, Standard & Poor’s and Fitch . Till the 70s rating agencies were not making high profits, but today they are extremely relevant such that in 1996 the New York Times was writing that there were just two powers in the world, the United...
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...Bonds are a written record of a debt. The borrower sells a bond in return for a loan. The holder of a bond receives interest payments and the final repayment. Bonds can also be sold in secondary financial markets. Bonds can also be referred to as fixed-income securities. They are long term securities for lenders to receive regular fixed payments (coupon payments), from the issuing institution, and receive the principle value of the debt (face value of bond), at the end of the bond period (date maturity). Bonds are issued by a small number of companies and banks. * Bonds are a special type of loan taken put by the governments and large companies. * This form of debt security is a written financial document issued by the borrower to the lender, individual or company, aka the “bondholder”. * The initial price of bond is the size of the loan (face value) * The bondholder is entitled to a fixed stream of income payments (coupon). These repayments lead to the initial loan amount when the bond matures. * The “yield” (rate of financial return on a bond), is calculated by dividing the coupon payment by the bond price. * If interest rates across the economy increase then the yield on the bond will also increase.This higher yield will lead to lower price for the bond. Visa Versa. * Therefore, the price of bonds will fluctuate according to changes in levels of interest rates. Aussie bonds yield biggest gains for global investors July...
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...Company (Metrobank). These banks local and foreign currency deposits are rated ‘Ba1/Not Prime’. Also under review is BDO’s foreign currency senior unsecured debt rating of ‘Ba1’ and Metrobank’s local currency subordinated debt rating of ‘Ba2’. “The bank financial strength ratings of the four banks remain unchanged,” Moody’s said in a statement. It explained that “credit strength of the government is an important input in our assessment of the government's capacity to provide support in times of stress.” "The review for upgrade of BDO's, BPI's, LBP's and MBT's ratings reflect our assessment that these ratings would likely benefit from an additional notch of systemic support uplift in the event that the parallel review of the Philippine sovereign debt rating concludes with a rating upgrade," Moody's Assistant Vice President and Lead Analyst for the Philippine banks Simon Chen said. Aside from assessing the government’s ability to extend support, the debt watcher said the current evaluation “will also take into account the systemic importance of each bank, which would influence the government's willingness to extend support in times of stress.” Among the factors that Moody’s will take into consideration in checking on the systemic importance of each of the banks are the bank's market share of system deposits and loans, and the financial institutions’ role in the country's payment system. The statement cited that “the government's...
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...Credit Risk – The risk of loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. Investors are compensated for assuming credit risk by way of interest payments from the borrower or issuer of a debt obligation. The higher the perceived credit risk, the higher the rate of interest that investors will demand for lending their capital. Credit risks are calculated based on the borrowers' overall ability to repay. This calculation includes the borrowers' collateral assets, revenue-generating ability and taxing authority (such as for government and municipal bonds). 1) Total loans to assets The loans to assets ratio measures the total loans outstanding as a percentage of total assets. The higher this ratio indicates a bank is loaned up and its liquidity is low. The higher the ratio, the more risky a bank may be to higher defaults. This figure is determined as follows: Loans to Assets = ( Loans / Total Assets ) 2) Nonperforming loans/total loans Nonperforming loans, or NPL, are loans that are no longer producing income for the bank that owns them. Loans become nonperforming when borrowers stop making payments and the loans enter default. The exact classification can vary from institution to institution, but a loan is usually considered to be nonperforming after it has been in default for three...
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...which buyers and sellers negotiate and transact business directly, without any intermediary such as resellers. * Secondary market - Financial market where previously issued securities (such bonds, notes, shares) and financial instruments (such as bills of exchange and certificates of deposit) are bought and sold. All commodity and stock exchanges, and over-the-counter markets, serve as secondary markets which (by providing an avenue for resale) help in reducing the risk of investment and in maintaining liquidity in the financial system. * Risk - Finance: The probability that an actual return on an investment will be lower than the expected return. Financial risk is divided into the following categories: Basic risk, Capital risk, Country risk, Default risk, Delivery risk, Economic risk, Exchange rate risk, Interest rate risk, Liquidity risk, Operations risk, Payment system risk, Political risk, Refinancing risk, Reinvestment risk, Settlement risk, Sovereign risk, and Underwriting risk. * Security - Finance: A financing or investment instrument issued by a company or government agency that denotes an ownership interest and provides evidence of a debt, a right to share in the earnings of the issuer, or a right in the distribution of a property. Securities include bonds, debentures, notes, options, shares, and warrants but not insurance policies, and may be traded in financial markets such as stock exchanges....
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...Chapter Sixteen Sovereign Risk Solutions for End-of-Chapter Questions and Problems: Chapter Sixteen 1. What risks are incurred when making loans to borrowers based in foreign countries? Explain. When making loans to borrowers in foreign countries, two risks need to be considered. First, the credit risk of the project needs to be examined to determine the ability of the borrower to repay the money. This analysis is based strictly on the economic viability of the project and is similar in all countries. Second, unlike domestic loans, creditors are exposed to sovereign risk. Sovereign risk is defined as the uncertainty associated with the likelihood that the host government may not make foreign exchange available to the borrowing firm to fulfil its payment obligations. Thus, even though the borrowing firm has the resources to repay, it may not be able to do so because of actions beyond its control. Thus, creditors need to account for sovereign risk in their decision process when choosing to invest abroad. 2. What is the difference between debt rescheduling and debt repudiation? Loan repudiation refers to a situation of outright default where the borrower refuses to make any further payments of interest and principal. In contrast, loan rescheduling refers to temporary postponement of payments during which time new terms and conditions are agreed upon between the borrower and lenders. In most cases, these new terms are structured to make it easier for the borrower to...
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