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72. COVID-19 and the U.S. Fiscal Imbalance
- Author:
- Jeffrey Miron
- Publication Date:
- 12-2020
- Content Type:
- Commentary and Analysis
- Institution:
- The Cato Institute
- Abstract:
- Policymakers must do something to slow the growing debt burden or else face a major fiscal meltdown. Proposals such as Medicare for All and the Green New Deal would only make the looming fiscal crisis worse. Before COVID-19, the U.S. debt burden was large and on an unsustainable path under reasonable assumptions about economic fundamentals. Standard policy responses, such as higher taxes or lower discretionary spending, could not substantially slow the growth of the U.S. debt burden; only reduced growth in entitlement spending, especially on Medicare, had the potential to avoid eventual fiscal default. COVID-19, the ensuing recession, and the subsequent policy responses have all increased U.S. deficits substantially, potentially altering these conclusions. But these events are likely to be temporary and may be partially offset by other demographic and economic changes related to COVID-19. As a result, the pandemic did not substantially alter the projected path of the U.S. fiscal imbalance. That bit of good news does not alter the grim long‐term U.S. fiscal outlook. The most effective way to slow the growth of the debt burden is to cut entitlement spending substantially.
- Topic:
- Debt, Tax Systems, Fiscal Policy, COVID-19, and Fiscal Deficit
- Political Geography:
- North America and United States of America
73. The Costs of Covid: Australia’s Economic Prospects in a Wounded World
- Author:
- John Edwards
- Publication Date:
- 08-2020
- Content Type:
- Commentary and Analysis
- Institution:
- Lowy Institute for International Policy
- Abstract:
- Despite Victoria’s second wave of infection, Australia’s economic recovery from the coronavirus is underway. The bitter aftermath includes high and rising unemployment, vastly increased government debt, and a markedly less congenial global economy. Though formidable, the fiscal challenge is well within Australia’s means, especially if the Reserve Bank remains willing to acquire and hold Australian government debt. It may need to do so anyway to suppress an unwelcome appreciation of the Australian dollar in a world where major central banks are committed to low long term interest rates. Australia’s increasing integration into the East Asia economic community offsets the drag from the major advanced economies, but the US–China quarrel and the dislocation of global trading and investment relationships it threatens heightens the tension between Australia’s economic and security choices.
- Topic:
- Debt, Economy, Fiscal Policy, Unemployment, and COVID-19
- Political Geography:
- China, Asia, Australia, North America, Asia-Pacific, and United States of America
74. Primary Dealer Systems in the European Union
- Author:
- Jenny Preunkert
- Publication Date:
- 06-2020
- Content Type:
- Research Paper
- Institution:
- Max Planck Sciences Po Center on Coping with Instability in Market Societies (MaxPo)
- Abstract:
- States require money to function and therefore every government has to continuously raise new funds. On the financial markets, governments cannot be sure that auctions of their debt will be sufficiently attractive to financial investors, which is why governments usually enter into cooperative agreements with selected banks. The best known and most widespread form of cooperation is the primary dealer system. Primary dealers are banks that agree to participate regularly in government debt auctions and to act as formalized market makers on government debt markets. The article analyzes European primary dealer systems and asks why banks are willing to participate in these systems. I will show that both domestic and foreign banks use their status as primary dealers to build long-term relationships with one or more European governments and to gain an advantage on the global stage. In Bourdieu’s terms, primary dealer banks use their financial capital to accumulate social and symbolic capital.
- Topic:
- Debt, Economics, International Political Economy, International Trade and Finance, Financial Markets, Banks, and Macroeconomics
- Political Geography:
- Europe and European Union
75. Debt Relief and a New Era in Canadian-African Relations
- Author:
- Michael Belafi
- Publication Date:
- 06-2020
- Content Type:
- Working Paper
- Institution:
- Council on International Policy (CIP)
- Abstract:
- African debt relief has repeatedly appeared in news around the world over the past month. Recently, the debate has come to Canada and the Government has claimed they’re considering it. Here are two reasons why Canada should pursue African debt relief.
- Topic:
- Debt, International Cooperation, Economic Cooperation, and COVID-19
- Political Geography:
- Africa, Canada, and North America
76. An Analysis of the Legal Framework for Public Debt Management in Zambia
- Author:
- Florence Banda-Muleya, Mbewe Kalikeka, Zambwe Shingwele, Philip Ngongo, and Shebo Nalishebo
- Publication Date:
- 04-2020
- Content Type:
- Working Paper
- Institution:
- Zambia Institute for Policy Analysis and Research (ZIPAR)
- Abstract:
- Zambia’s current legal framework for public debt management is inadequate. The high level of external debt standing at US$11.2 billion and domestic debt at K80.2 billion due to fast pace of debt contraction; the resulting heightened risk of debt distress; and the weak implementation of the 2017-2019 Medium Term Debt Strategy (MTDS), raise questions on the adequacy of the laws that govern public debt management. Now more than ever, with Zambia quickly headed to its first bullet repayment on its Eurobond debt, the country needs to enhance its legal framework on Public Debt Management (PDM).
- Topic:
- Debt, Government, Economy, and Public Debt
- Political Geography:
- Africa and Zambia
77. Coping with Disasters: Two Centuries of International Official Lending
- Author:
- Sebastian Horn, Carmen M. Reinhart, and Christoph Trebesch
- Publication Date:
- 06-2020
- Content Type:
- Working Paper
- Institution:
- Kiel Institute for the World Economy (IfW)
- Abstract:
- Official (government-to-government) lending is much larger than commonly known, often surpassing total private cross-border capital flows, especially during disasters such as wars, financial crises and natural catastrophes. We assemble the first comprehensive long-run dataset of official international lending, covering 230,000 loans, grants and guarantees extended by governments, central banks, and multilateral institutions in the period 1790-2015. Historically, wars have been the main catalyst of government-to-government transfers. The scale of official credits granted in and around WW1 and WW2 was particularly large, easily surpassing the scale of total international bailout lending after the 2008 crash. During peacetime, development finance and financial crises are the main drivers of official cross-border finance, with official flows often stepping in when private flows retrench. In line with the predictions of recent theoretical contributions, we find that official lending increases with the degree of economic integration. In crises and disasters, governments help those countries to which they have greater trade and banking exposure, hoping to reduce the collateral damage to their own economies. Since the 2000s, official finance has made a sharp comeback, largely due to the rise of China as an international creditor and the return of central bank cross-border lending in times of stress, this time in the form of swap lines.
- Topic:
- Debt, International Political Economy, War, History, Financial Crisis, Trade, and Banking
- Political Geography:
- Global Focus
78. The Cost of Debt-financed War: Public Debt and Rising Interest for Post-9/11 War Spending
- Author:
- Heidi Peltier
- Publication Date:
- 01-2020
- Content Type:
- Working Paper
- Institution:
- Watson Institute for International and Public Affairs at Brown University
- Abstract:
- Throughout the 18 years the U.S. has been engaged in the “Global War on Terror,” mainly in Iraq and Afghanistan, the government has financed this war by borrowing funds rather than through alternative means such as raising taxes or issuing war bonds. Thus, the costs of the post-9/11 wars include not only the expenses incurred for operations, equipment, and personnel, but also the interest costs on this debt. Since 2001 these interest payments have been growing, resulting in more and more taxpayer dollars being wasted on interest payments rather than being channeled to more productive uses. This paper calculates that the debt incurred for $2 trillion in direct war-related spending by the Department of Defense and State Department has already resulted in cumulative interest payments of $925 billion. Even if military interventions ceased immediately, interest payments would continue to rise, and will grow further as the U.S. continues its current military operations. War is expensive — in terms of lives lost, physical damage to people and property, mental trauma to soldiers and war-zone inhabitants, and in terms of money. The expense of war is not restricted to the annual budgetary costs of the war spending itself, but also depends upon the way in which war is financed. When war is financed through debt, the costs are much greater than when it is financed through taxation or other revenues, since interest payments must be made as long as the debt is outstanding. In fact, interest payments can sometimes grow to beyond the level of the debt itself, as will likely be the case with the post-9/11 wars. If war spending ceased immediately, interest payments on the $2 trillion of existing war debt would rise to over $2 trillion by 2030 and to $6.5 trillion by 2050. These interest payments will grow larger as the U.S. continues its post-9/11 military interventions and continues amassing debt to pay for the costs of war.
- Topic:
- Debt, War, Armed Forces, and Military Spending
- Political Geography:
- North America and United States of America
79. COVID-Induced Sovereign Risk in the Euro Area: When Did the ECB Stop the Contagion?
- Author:
- Aymeric Ortmans and Fabien Tripier
- Publication Date:
- 10-2020
- Content Type:
- Working Paper
- Institution:
- Centre d'Etudes Prospectives et d'Informations Internationales (CEPII)
- Abstract:
- This paper studies how the announcement of the ECB’s monetary policies stopped the spread of the COVID-19 pandemic to the European sovereign debt market. We show that up to March 9, the occurrence of new cases in euro area countries had a sizeable and persistent effect on 10-year sovereign bond spreads relative to Germany: 10 new confirmed cases per million people were accompanied by an immediate spread increase of 0.03 percentage points (ppt) that lasted 5 days, for a total increase of 0.35 ppt. For periods afterwards,the effect falls to near zero and is not significant. We interpret this change as an indicator of the success of the ECB’s March 12 press conference, despite the “we are not here to close spreads” controversy. Our results hold for the stock market, providing further evidence of the effectiveness of the ECB’s March 12 announcements in stopping the financial turmoil. A counterfactual analysis shows that without the shift in the sensitivity of sovereign bond markets to COVID-19, spreads would have surged to 4.2% in France, 12.5% in Spain, and 19.5% in Italy by March 18, when the ECB’s Pandemic Emergency Purchase Programme was finally announced.
- Topic:
- Debt, Economics, International Political Economy, Markets, Central Bank, COVID-19, and Banking
- Political Geography:
- Europe
80. Covid 19: a new challenge for the EMU
- Author:
- Anne-Laure Delatte and Alexis Guillaume
- Publication Date:
- 07-2020
- Content Type:
- Working Paper
- Institution:
- Centre d'Etudes Prospectives et d'Informations Internationales (CEPII)
- Abstract:
- Although the pandemic was an exogenous shock, it triggered portfolio rebalancing in the Euro Area (EA) implying a divergence of sovereign risk premia in the first phase of the crisis eventually followed by a narrowing of the spreads. We estimate the determinants of sovereign bond spreads in the EA during the pandemic from January 2 2020 to May 25 2020. We find that: 1) the countries’ resilience to the COVID shock depended on healthcare capacity, the strength of the banking sector and the fiscal outlook; 2) during the crisis, ECB speeches were a game changer and made a much greater contribution than securities purchase programs; 3) coordination by the European Council also helped to reduce the spreads but the effect was partly offset by loan-based financial assistance programs.
- Topic:
- Debt, Monetary Policy, European Union, Finance, COVID-19, Bonds, and European Monetary Union
- Political Geography:
- Europe