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1. The Greek Tragedy: Narratives and Imagined Futures in the Greek Sovereign Debt Crisis

Author:
Jens Beckert and Hans Lukas Richard Arndt
Publication Date:
04-2024
Content Type:
Working Paper
Institution:
Max Planck Institute for the Study of Societies
Abstract:
Between 2009 and 2015 Greece underwent a profound sovereign debt crisis that led to a serious political crisis in Europe and the restructuring of Greek debt. We argue that the prevalence of negative narratives about the future contributed to the changes in spreads of Greek bonds during the crisis. We support our argument by presenting results from text mining a corpus of 9,435 articles from the Financial Times and the Wall Street Journal. Based on sentiments and a machine learning model predicting future reference, we identify newspaper articles which generate negative and uncertain outlooks for the future in the expert discourse. We provide evidence from time series regression analysis showing that these negative imagined futures have explanatory power in models estimating spread development of Greek vs. German sovereign bonds. We suggest that these findings provide good evidence for the relevance of “imagined futures” for investors’ behavior, and give directions for an innovative contribution of sociology to understanding the microfoundations of financial crises.
Topic:
Debt, Financial Crisis, Financial Markets, Future, Sovereign Debt, Economic Sociology, Sentiment Analysis, and Valuation
Political Geography:
Europe and Greece

2. Dealing Government Bonds: Trading Infrastructures and Infrastructural Power in European Markets for Public Debt

Author:
Arjen van der Heide
Publication Date:
02-2024
Content Type:
Working Paper
Institution:
Max Planck Institute for the Study of Societies
Abstract:
Confronted with increased difficulties to raise taxation, high inflation, and pressures to maintain social spending, many rich democracies have increasingly sought to raise funds in financial markets since the 1970s. Using the notion of “infrastructural power,” this paper examines the various ways in which states have become infrastructurally entangled with key actors in financial markets that provide the infrastructure of today’s markets for government bonds. Drawing on twenty-two interviews with debt managers and market participants, and documentary material, the article analyses the rise to prominence of MTS (Mercato dei Titoli di Stato), an electronic platform for trading government bonds that has become a key feature of Europe’s government bond market infrastructure. It traces the emergence of MTS in Italy, its rapid diffusion through Europe and its limited (or even non-existent) success in gaining market share in Germany and the UK. In so doing, this paper finds that some debt management units actively regulate their secondary bond markets to stimulate competition among dealer banks; they “orchestrate” the market for government bonds. Others take a more hands-off approach and only engage with secondary markets mostly as market participants by issuing debt instruments and perhaps buying and selling them in the secondary market. These differences are important for understanding the politics of sovereign debt: they reflect power relations, may impact states’ cost of borrowing and their capacity to withstand moments of fiscal stress.
Topic:
Infrastructure, Financial Markets, Banks, Public Debt, and Bonds
Political Geography:
Global Focus

3. Asset Price Changes, External Wealth and Global Welfare

Author:
Timothy Meyer
Publication Date:
02-2024
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
U.S. equity outperformance and sustained dollar appreciation have led to large valuation gains for the rest of the world on the U.S. external position. The author constructs their global distribution, carefully accounting for the role of tax havens. Valuation gains are concentrated and large in developed countries, while developing countries have been mostly bypassed. To assess the welfare implications of these capital gains, the author adopts a sufficient statistics approach. In contrast to the large wealth changes, most countries so far did not benefit much in welfare terms. This is because they did not rebalance their portfolios and realize their gains, while they were further hurt by rising import prices from the strong dollar.
Topic:
Globalization, Financial Markets, Currency, Valuation, and Foreign Assets
Political Geography:
North America and United States of America

4. African Sovereign Defaults and the Common Framework: Divergent Chinese Interests Grant Western Countries a “Consumer Surplus”

Author:
Eckhardt Bode
Publication Date:
05-2024
Content Type:
Policy Brief
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
• China has become a major player in sovereign lending towards Africa during the past two decades but has recently been faced with increasing defaults. A new African debt crisis is looming. • Differences in the motives of sovereign lending between China and Western creditor countries contribute to preventing effective global sovereign debt management under the “Common Framework for Debt Treatment” in this looming African debt crisis. Chi-nese lending during the past two decades was motivated primarily by its own economic interests while most of the Western countries’ lending appears to be at odds with their self-interests but is not yet well-understood. • Debt settlements under the Common Framework that involve China are less generous than past settlements with the Paris Club alone. This is an obstacle to a rapid and sus-tainable economic recovery of financially distressed African countries. • Western countries derive a kind of “consumer surplus” from the agreements under the Common Framework because they are prepared to make greater concessions than Chi-na. They could transfer this hypothetical surplus as additional (conditional) Official De-velopment Assistance to the defaulted African countries to alleviate social hardship.
Topic:
Emerging Markets, International Trade and Finance, Financial Markets, Lending, Economic Crisis, Sovereign Debt, Consumer Behavior, and Geoeconomics
Political Geography:
Africa and China

5. International investment income: patterns, drivers, and heterogeneous sensitivities

Author:
Giovanni Donato and Cedric Tille
Publication Date:
07-2024
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
Financial globalization has led to a large increase in international asset holdings. While the rise of associated dividend and interest flows has until now been muted by the decreasing trend in interest rates, this pattern could change, leading to a larger role of investment income flows in the balance of payments. We use a broad sample of countries to document the heterogeneous evolution of the various components of investment income flows, with a rising role of FDI and equity income, especially in advanced economies. We then assess the impact of various variables on yields with a panel analysis. Various drivers have highly heterogeneous effects across investment categories and country groups, often impacting the yields on both assets and liabilities. This translates into substantial heterogeneity in the response of countries’ income balance, due to different compositions of asset and liabilities. This heterogeneity is amplified if we consider country-specific estimates in complement to the panel ones. Focusing on the impact of changes in interest rates, we find that higher rates only had a limited impact in the 2013 taper tantrum, investment income balances are likely to benefit from higher US rates in the current phase of higher rates, with offsetting effects of higher domestic rates.
Topic:
International Trade and Finance, Foreign Direct Investment, Financial Markets, Investment, Interest Rates, and Financial Integration
Political Geography:
Global Focus

6. The Growth of Private Financial Markets

Author:
Lenore Palladino and Harrison Karlewicz
Publication Date:
05-2024
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
Over the past decade, “private” financial markets, which face little oversight by regulators, have grown to the point where they dominate financial activity. Private funds have approximately tripled in size in the last decade to $26 trillion in gross assets (compared to the $23 trillion in the U.S. commercial banking industry). Private markets raise more in equity than public markets: in 2021, new stock issuances resulted in $434.7 billion, while private markets raised $1.73 trillion in committed funds that same year–almost four times as much. Private markets are structured differently–organized into funds by asset managers as limited partnerships, which shields general managers from liability. The primary dealers in these private markets are venture capital, private equity, private credit funds, and private real asset managers. In this working paper, we examine four institutional shareholder types: public and private pension funders, endowment plans, and foundations. Institutional shareholders now allocate 28-35% of their assets under management to the “alternative” assets of private markets. Pension funds alone currently account for $2.7 trillion in committed funds to private financial markets, the latter of which has ballooned to $26 trillion in gross assets. This development potentially represents new systemic risks to the economy at large and for the institutional shareholders participating in these markets.
Topic:
Economics, Markets, Regulation, and Financial Markets
Political Geography:
Global Focus

7. Sanction-busting through tax havens

Author:
Kerim Can Kavakli, Giovanna Marcolongo, and Diego Zambiasi
Publication Date:
04-2023
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
Financial sanctions, which aim to economically hurt a target by restricting its access to financial assets and markets, require the ability to identify who owns an asset. Although experts have long claimed that offshore financial centres that offer secrecy (‘tax havens’) undermine sanctions by hiding ownership information, so far data limitations have prevented a rigorous test of this claim. We overcome this constraint using data from the Bank of International Settlements and the Offshore Leaks Database and conduct the first systematic analysis of the role that tax havens play in financial sanction evasion. Our main finding is that sanction targets reduce their funds in sanctioning countries while increasing their funds in tax havens. This displacement effect is stronger when the sanction coalition includes the United States or comprises more FATF or OECD members. Lastly, whether a tax haven is in the sanctioning coalition does not seem to make a difference. These findings confirm that target countries evade sanctions by moving large portions of their funds from sanctioning countries to tax havens. More broadly, our paper highlights a novel and geostrategically important role of tax havens in global finance.
Topic:
Sanctions, Financial Markets, Leaks, and Tax Havens
Political Geography:
Global Focus

8. Signaling Virtue or Vulnerability? The Changing Impact of Exchange Rate Regimes on Government Bond Yields

Author:
Z. Barta, Lucio Baccaro, and A. Johnston
Publication Date:
01-2022
Content Type:
Working Paper
Institution:
Max Planck Institute for the Study of Societies
Abstract:
Do exchange rate regimes affect the conditions under which developed countries borrow? This paper argues that they do, but their impact on yields depends on the prevailing macroeconomic context. When investors regard inflation as the most relevant risk to bond holdings, monetary union has a distinct advantage over floating and fixed exchange rates because of its credible in-built mechanism to control inflation. However, once default is seen as the most relevant risk, exchange rate rigidity becomes a liability due to its constraining effect on governments’ ability to respond to adverse shocks. We test our argument with a moving window panel analysis for twenty-three OECD countries from 1980 to 2017. We find that before the late 2000s, inflation was penalized under floating and (to a lesser extent) fixed exchange rate regimes, but not in countries in monetary union. Since the 2010s, inflation carries no penalty under any exchange rate regime. Variables linked to default risk (debt and entitlement spending) did not affect yields under any exchange rate arrangements until the mid-2000s. Afterwards, countries in monetary union (and to a lesser extent in fixed exchange rate regimes) were significantly penalized for public debt and entitlement spending, whereas countries with floating regimes were not. Our results speak to the literatures on governments’ institutional commitments and “room to move.”
Topic:
Financial Markets, Bonds, Exchange Rates, and Euro
Political Geography:
Global Focus

9. Energy Markets and the Design of Sanctions on Russia

Author:
Christof Ruhl
Publication Date:
03-2022
Content Type:
Commentary and Analysis
Institution:
Center on Global Energy Policy (CGEP), Columbia University
Abstract:
Sanctions against the citizens, institutions, and products of the Russian Federation are evolving rapidly. Energy sanctions started late, but the number of countries embargoing oil, gas, or coal imports from Russia is expanding. These sanctions are likely to increase global fuel prices while depressing the price of the sanctioned fuel. The experience to date suggests that the current, gradual approach of reducing oil and gas imports from Russia one country at a time may have room to go further. Before the invasion of Ukraine, the sweeping and unprecedented sanctions promised in the event of a Russian invasion were often conceived as a two-pronged pincer movement. The idea was to isolate Russia from the global financial system while limiting its commodity and energy exports. Both moves were aimed at the source of the financial strength of “fortress Russia,” namely, its persistent balance of payment surplus.
Topic:
Energy Policy, International Trade and Finance, Sanctions, Financial Markets, and Conflict
Political Geography:
Russia and Europe

10. Signaling Virtue or Vulnerability? The Changing Impact of Exchange Rate Regimes on Government Bond Yields

Author:
Zsófia Barta, Lucio Baccaro, and Alison Johnston
Publication Date:
09-2022
Content Type:
Working Paper
Institution:
Max Planck Sciences Po Center on Coping with Instability in Market Societies (MaxPo)
Abstract:
Do exchange rate regimes affect the conditions under which developed countries borrow? This paper argues that they do, but their impact on yields depends on the prevailing macroeconomic context. When investors regard inflation as the most relevant risk to bond holdings, monetary union has a distinct advantage over floating and fixed exchange rates because of its credible in-built mechanism to control inflation. However, once default is seen as the most relevant risk, exchange rate rigidity becomes a liability due to its constraining effect on governments’ ability to respond to adverse shocks. We test our argument with a moving window panel analysis for twenty-three OECD countries from 1980 to 2017. We find that before the late 2000s, inflation was penalized under floating and (to a lesser extent) fixed exchange rate regimes, but not in countries in monetary union. Since the 2010s, inflation carries no penalty under any exchange rate regime. Variables linked to default risk (debt and entitlement spending) did not affect yields under any exchange rate arrangements until the mid-2000s. Afterwards, countries in monetary union (and to a lesser extent in fixed exchange rate regimes) were significantly penalized for public debt and entitlement spending, whereas countries with floating regimes were not. Our results speak to the literatures on governments’ institutional commitments and “room to move.”
Topic:
International Political Economy, Financial Markets, Bonds, Exchange Rates, and Euro
Political Geography:
Global Focus