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51. Fiscal Tightening and Economic Growth: Exploring Cross-Country Correlations

Author:
Paolo Mauro and Jan Zilinsky
Publication Date:
09-2015
Content Type:
Policy Brief
Abstract:
The global financial and economic crisis that began in 2008 has rekindled the debate on the impact of fiscal policy on economic growth. At the outset of the crisis the focus—particularly in the United States—was on whether fiscal stimulus (an expansion in the fiscal deficit) boosts economic growth. Since 2011 or so, with the depth of the crisis becoming more severe in some European countries and Greece in particular, the emphasis of the debate has shifted to whether fiscal adjustment (a reduction in the fiscal deficit) curtails economic growth. Public discourse has been heavily influenced by simple charts analyzing the correlations between measures of fiscal "austerity" and economic growth for small samples of countries over limited time periods. Mauro and Zilinsky analyze the correlations in the data starting from the simplest and gradually building up, in a step-by-step, transparent manner, to multivariate regressions based on various samples of countries for different periods. The results show that simple correlations are no longer significant when considering slightly longer sample periods and omitting outliers, like Greece, from the sample. In multivariate regressions using broader samples, a tightening of fiscal policy is significantly associated with lower economic growth only in some specifications and estimation samples. On the whole, the data offer partial support to the notion that fiscal choices and output growth are correlated.
Topic:
Debt, Economics, and Financial Crisis
Political Geography:
Global Focus

52. Where the Lions Are: Gazprom's "Energetic Pliers" and Aspirations of a Eurasian Archipelago: The Geopolitics of Russia's Networked Energy Infrastructure

Author:
John Haines
Publication Date:
08-2015
Content Type:
Book
Abstract:
In a recent essay, George Friedman wrote with admirable clarity about an intelligence truism that is at one and the same time elemental and frequently overlooked: “The entire principle of strategic intelligence is to ruthlessly discard the subcritical noise that is being collected in order to identify the center of gravity of events. A tiny hint may sometimes draw attention to a major process, particularly in military affairs. Finding that tiny hint, however, requires huge amounts of time and effort, and little time is left to understand the meaning. Moreover, in many cases, the process is in plain sight. The trick is to see it, and the even harder trick is to believe it.” With that charge, the objective of this essay is to look at Russia’s network of natural gas pipelines and ethnic enclaves in its near abroad in the interest of exploring whether and how the two intersect. The initial hypothesis is that ethnic separatism is instrumental to the former in two fundamental ways. First, these enclaves are located geographically along major energy pipeline routes, often at key junctures in pipeline networks. Second, they sit atop substantial shale gas reserves, the determined exploitation of which would decisively undercut Russia's natural gas oligopoly. They constitute specific, identifiable “spheres of privileged interests” in Russian foreign policy. The idea for this essay began with a conversation with a Moldovan diplomat about Transnistria, a separatist region of his country that has amassed a staggering debt—in excess of $5 billion—for the purchase of Russian natural gas. Russia's use of this debt to exert political pressure on Moldova is a story broadly understood.[4]
Topic:
Foreign Policy, Debt, Economics, Energy Policy, and Natural Resources
Political Geography:
Russia

53. Just Enough, Just in Time: Improving Sovereign Debt Restructuring for Creditors, Debtors and Citizens

Author:
Richard Gitlin and Brett House
Publication Date:
07-2015
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation
Abstract:
Recent international financial turmoil — most notably in Greece — has refocused attention on the risks posed by severe sovereign debt crises and weaknesses in our approaches to restructuring sovereign debt. Since early 2010, these risks have driven a range of debt-related policy proposals and actions in individual economies, across regions and at the international financial institutions. While some incremental first reform steps have been taken, these have not yet produced a more efficient, effective or resilient international framework for handling severe sovereign debt crises and effecting sovereign debt workouts. In contrast, some institutional and policy changes made in the heat of the euro-zone crisis have raised as many questions as they have resolved. Old policy ideas are also being resurrected and configured in new ways for current challenges. After years of substantial fiscal stimulus and exceptional monetary policies, high debt burdens across the advanced economies, fears of secular stagnation, signs of an imminent increase in US borrowing costs and deteriorating demographics together make a compelling case for concerted action to improve international arrangements for dealing with distressed sovereign debt.
Topic:
Debt, Economics, Monetary Policy, Financial Crisis, and Global Markets
Political Geography:
Global Focus

54. Corporate Debt in Emerging Economies: A Threat to Financial Stability?

Author:
Barry Eichengreen, Domenico Lombardi, Malcolm D. Knight, Yu Yongding, Stephen G. Cecchetti, Diane De Gramont, Şebnem Kalemli-Özcan, Phillip R. Lane, Ugo Panizza, and Viral V. Acharya
Publication Date:
09-2015
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation
Abstract:
During 1999-2007, the international balance sheets of emerging economies grew stronger through a combination of current account surpluses, a shift from debt funding to equity funding, and the stockpiling of liquid foreign reserves. This risk-mitigating strategy improved the international financial standing of many emerging economies and helped these economies withstand the 2008-2009 global financial crisis. However, a combination of domestic and external factors has led to a partial reversal of this strategy, with some emerging economies accumulating significant external debt since 2010. Previewed by the May 2013 “taper tantrum,” there has been considerable speculation that a tightening of dollar-funding conditions and a macroeconomic slowdown in emerging economies may result in financial instability in some emerging economies.
Topic:
Debt, Economics, Emerging Markets, International Trade and Finance, Financial Crisis, and Global Markets
Political Geography:
Global Focus

55. Ukraine and the IMF's Evolving Debt Crisis Narrative

Author:
Susan Schadler
Publication Date:
11-2015
Content Type:
Policy Brief
Institution:
Centre for International Governance Innovation
Abstract:
Against the International Monetary Fund’s (IMF’s) fraught experience with crises where debt restructuring is needed, Ukraine’s recent restructuring agreement has been a success. Several factors — in particular, Ukraine’s geopolitical position and the composition of its creditors — facilitated official support for the deal. As these are unlikely to be replicated in future debt crises, the IMF still needs a revamping of its policies and approach in crises requiring debt restructuring. This policy brief examines a number of key challenges in the evolution of a coherent role for the IMF in future crises.
Topic:
Debt, Political Economy, International Monetary Fund, Financial Crisis, and Global Markets
Political Geography:
Ukraine

56. The Rise of the European Consolidation State

Author:
Wolfgang Streeck
Publication Date:
02-2015
Content Type:
Working Paper
Institution:
Max Planck Institute for the Study of Societies
Abstract:
The rise of the consolidation state follows the displacement of the classical tax state, or Steuerstaat, by what I have called the debt state, a process that began in the 1980s in all rich capitalist democracies. Consolidation is the contemporary response to the “fiscal crisis of the state” envisaged as early as the late 1960s, when postwar growth had come to an end. Both the long-term increase in public debt and the current global attempts to bring it under control were intertwined with the “financialization” of advanced capitalism and its complex functions and dysfunctions. The ongoing shift towards a consolidation state involves a deep rebuilding of the political institutions of postwar democratic capitalism and its international order. This is the case in particular in Europe where consolidation coincides with an unprecedented increase in the scale of political rule under European Monetary Union and with the transformation of the latter into an asymmetric fiscal stabilization regime. The paper focuses on the developing structure of the new consolidation regime and its consequences for the relationship between capitalism and democracy.
Topic:
Debt, Monetary Policy, Democracy, Capitalism, and Financial Markets
Political Geography:
Global Focus

57. Corporate debt securities market in Poland: state of art, problems, and prospects for development

Author:
Agnieszka Gontarek, Piotr Kowalski, and Tomasz Gałka
Publication Date:
09-2015
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
The development of the Polish corporate bonds market resulted from changes on the supply side. When the Lehman Brothers went bankrupt, Polish entrepreneurs realized that financing their companies’ operations only with the use of credit, even if contracted from different sources, might not be the best idea. Consequently, Polish business turned to debt instruments – said Piotr Kowalski, one of the keynote speakers during the mBank - CASE Seminar no. 136. In the publication, which is an extended and authorized version of presentations delivered during the abovementioned seminar, the authors discuss various aspects of the corporate debt securities market in Poland. Piotr Kowalski gives a synthetic presentation of the subject of the analysis, Agieszka Gontarek presents selected domestic regulations and factors, and Tomasz Gałka writes about selected consequences of excessive burdens.
Topic:
Debt, Business, Economic growth, Banks, and Trade
Political Geography:
Europe, Central Asia, Caucasus, Eastern Europe, and Poland

58. Sovereign Bond Contract Reform: Implementing the New ICMA Pari Passu and Collective Action Clauses

Author:
Gregory Makoff and Robert Kahn
Publication Date:
02-2015
Content Type:
Working Paper
Institution:
Centre for International Governance Innovation
Abstract:
In August 2014, following an extensive consultative process, the International Capital Market Association (ICMA) published proposed standard terms for new, aggregated collective action clauses (CACs). Concurrently, ICMA released new model wording for the pari passu clause typically included in international sovereign bond contracts. These announcements and the commencement of issuance of bonds with these clauses are an important turning point in the evolution of sovereign bond markets. The new CACs will make it much harder for holdout creditors to disrupt future bond restructurings or to be paid in full after the other bondholders receive haircuts. Under the new contractual form, a supermajority of bondholders can vote to force non-participating creditors into a restructuring, subject to strong protections against the abuse of minority creditors by the majority. At the same time, the new pari passu clause is designed to prevent the kind of rulings that lead to a disruption in payments to investors, as was the recent case with Argentina. Neutralizing holdout creditors in this fashion is of immense economic importance. It should facilitate more predictable outcomes for debtors and creditors, and fairer outcomes among creditors in situations that require debt restructuring. However, even with the rapid issuance of bonds under the new ICMA framework, the potential for disorderly debt restructurings will remain until the vast majority of old bonds, already in the stock of debt of sovereign borrowers, have been converted to bonds that include the new clauses. This may take more than a decade. A strong case exists for the establishment of a coordinated public-private initiative that is focused on converting existing stocks of debt to the new format. While benefits to issuers and investors should provide a market force to drive the rapid uptake of the new clauses, the Group of Twenty (G20), working closely with the International Monetary Fund (IMF) and creditor groups, is uniquely positioned to give legitimacy to discussions of accelerated adoption of the new clauses, as well as discussions of further mechanisms to facilitate orderly debt restructuring. This paper discusses the ICMA consultative process to develop the new clauses, explains the workings of CACs and the history of their adoption, analyzes the effect of the new clauses in reducing holdout activity and discusses the use of bondholder meetings and exchange offers to accelerate the conversion of outstanding debt stocks into the new format.
Topic:
Debt and International Monetary Fund
Political Geography:
Argentina

59. From Financial Repression to External Distress: The Case of Venezuela

Author:
Carmen M. Reinhart and Miguel Angel Santos
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
The John F. Kennedy School of Government at Harvard University
Abstract:
Recent work has supported that there is a connection between domestic debt level and sovereign default on external debt. We examine the potential linkages in a case study of Venezuela from 1984 to 2013. This unique example encompasses multiple financial crises, cycles of liberalization and policy reversals, and alternative exchange rate arrangements. The Venezuelan experience reveals a nexus among domestic debt, financial repression, and external vulnerability. Unlike foreign currency-denominated debt, debt in domestic currency may be reduced through financial repression, a tax on bondholders and savers producing negative real interest rates. Using a variety of methodologies we estimate the magnitude of the tax from financial repression. On average, this financial repression tax (as a share of GDP) is similar to those of OECD economies, in spite of much higher domestic debt-to-GDP ratios in the latter. The financial repression "tax rate" is significantly higher in years of exchange controls and legislated interest rate ceilings. In line with earlier literature on capital controls, our comprehensive measures of capital flight document a link between domestic disequilibrium and a weakening of the net foreign asset position via private capital flight. We suggest these findings are not unique to the Venezuelan case.
Topic:
Debt, Finance, Capital Flows, Inflation, and Interest Rates
Political Geography:
South America and Venezuela

60. Germany and the Future of the Eurozone

Author:
Sebastian Plóciennik
Publication Date:
01-2014
Content Type:
Policy Brief
Institution:
The Polish Institute of International Affairs
Abstract:
Although the euro has survived the most severe phase of the current crisis, its future is still uncertain. The fate of the common currency will depend not only on the condition of the European economy, but also the priorities of its biggest player—Germany. So far that country has been strong enough to enforce its own vision of integration based on neoliberal reforms and austerity measures. Since the side effects of this prescription have been rising costs and risks, Berlin's new government will consider a range of different solutions, including in extremis a controlled and partial break-up of the Eurozone. For Poland, this volatility creates a challenging environment with risks, but also creates chances for Warsaw to increase its influence over the evolution of EU integration in this field.
Topic:
Debt, Economics, Monetary Policy, Financial Crisis, and Reform
Political Geography:
Europe and Germany