The Search for a Euro Area Safe Asset

The Search for a Euro Area Safe Asset. Peterson Institute for International Economics. Álvaro Leandro and Jeromin Zettelmeyer.  Working Paper 18-3. March 2018

 This paper evaluates four approaches to creating “safe assets” or asset portfolios for the euro area: (1) a diversified portfolio of senior tranches of sovereign debt (“national tranching”); (2) a senior security backed by a diversified pool of national sovereign debt (“ESBies”); (3) debt issued by a senior financial intermediary, backed by a diversified pool of national debt (“E-bonds”); and (4) debt issued by a euro area budget or a leveraged wealth fund, based on member state contributions or dedicated direct revenue sources. None of these approaches envisages explicit guarantees by member states, and all could potentially produce safe assets in sufficient quantities to replace euro area sovereign bond holdings in euro area banks. At the same time, the four approaches differ across several important dimensions. A euro area budget or wealth fund could create the largest volume of safe assets, followed by ESBies, E-bonds, and national tranching. A euro area budget or wealth fund is also likely to have the lowest impact on the structure and liquidity of national bond markets, while national tranching would have the largest impact. ESBies and E-bonds occupy an intermediate position. ESBies and potentially bonds issued by a euro area budget would offer their holders greater protection from deep national defaults than the other two proposals. Both ESBies and national tranching would avoid cross-country redistribution by construction, whereas E-bonds and a euro area budget could have significant distributional consequences, depending on their design. E-bonds are unique in that they would raise the marginal cost of sovereign debt issuance at higher levels of debt, thereby exerting fiscal discipline, without necessarily raising average debt costs for lower-rated borrowers. [Note: contains copyrighted material].

 [PDF format, 68 pages].

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Does Greece Need More Official Debt Relief? If So, How Much?

Does Greece Need More Official Debt Relief? If So, How Much? Peterson Institute for International Economics. Working Paper, 17-6. Jeromin Zettelmeyer, Eike Kreplin and Ugo Panizza. April 2017

Creditor countries and international organizations continue to disagree whether Greece should receive additional official debt relief, and if so how much. This paper first shows that these disagreements can be attributed to competing assumptions about Greece’s future capacity to repay, particularly about economic growth and the fiscal primary balance. It next evaluates the plausibility of alternative primary balance assumptions using international evidence about fiscal adjustment experiences. It concludes that primary balance paths required to make Greece’s debt sustainable are not plausible and that Greece will therefore require additional debt relief. Finally, the paper shows that the debt relief measures suggested by the Eurogroup in May 2016 (albeit with significant caveats on whether they will in fact be granted or not) could be sufficient to address Greece’s sustainability problem, provided the Eurogroup is prepared to accept both very long maturity extensions on European Financial Stability Facility (EFSF) debt (to 2080 and beyond) and interest deferrals that could lead to a large rise in EFSF exposure to Greece before it begins to decline. If the Eurogroup wishes to avoid the latter, it will become necessary to either (1) extend the scope of the debt restructuring, (2) lower the interest rates charged by the EFSF significantly below current predictions, or (3) extend European Stability Mechanism (ESM) financing beyond 2018 and delay Greece’s return to capital markets for a protracted period. [Note: contains copyrighted material].

[PDF format, 54 pages, 479.65 KB].

The United States as a Net Debtor Nation: Overview of the International Investment Position

The United States as a Net Debtor Nation: Overview of the International Investment Position. Congressional Research Service, Library of Congress. James K. Jackson. October 7, 2016

The international investment position of the United States is an annual measure of the assets Americans own abroad and the assets foreigners own in the United States. The net position, or the difference between the two, sometimes is referred to as a measure of U.S. international indebtedness. This designation is not strictly correct, because the net international investment position reveals the difference between the total assets Americans own abroad and the total amount of assets foreigners own in the United States. These assets generate flows of capital into and out of the economy that have important implications for the value of the dollar in international exchange markets. Some Members of Congress and some in the public have expressed concerns about the U.S. net international investment position because of the role foreign investors are playing in U.S. capital markets and the potential for large outflows of income and services payments. Some observers also argue that the U.S. reliance on foreign capital inflows places the economy in a vulnerable position.

[PDF format, 18 pages, 755.07 KB].

Argentina Default Flashes Warning to Emerging Markets

Argentina Default Flashes Warning to Emerging Markets. YaleGlobal. Will Hickey. September 9, 2014.

Argentina, among the world’s top 25 economies, is trying to seek relief with bondholders and avoid being locked out of international credit markets. A U.S. judge has sided with a minority of bondholders led by a U.S. billionaire, blocking payments to the 90 percent who agreed to restructuring. For now, despite the judge’s ruling that all or none of the bondholders be paid, Argentina explores debt swaps and a separate account for the holdouts. The case highlights the challenges for emerging economies, explains Will Hickey. Advanced nations push ideas that require complex financing vehicles, developing nations have few financing alternatives, priorities change over the life of a bond, and investments are subject to speculation. As trouble emerges, a few wealthy bondholders can pursue highly complex legal cases. So far, U.S. courts have ruled that speculators who purchase debt for pennies can pursue full payment. If not careful, Hickey concludes, the emerging economies could be trapped into never-ending debt. [Note: contains copyrighted material].

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Debt in America

Debt in America. Urban Institute. Carolinge Ratcliffe et al. July 29, 2014.

Debt can be constructive, allowing people to build equity in homes or finance education, but it can also burden families into the future. Total debt is driven by mortgage debt; both are highly concentrated in high-cost housing markets, mostly along the coasts. Among Americans with a credit file, average total debt was $53,850 in 2013, but was substantially higher for people with a mortgage ($209,768) than people without a mortgage ($11,592). Non-mortgage debt, in contrast, is more spatially dispersed. It ranges from a high of $14,532 in the East South Central division to a low of $17,883 in New England. [Note: contains copyrighted material].

[PDF format, 14 pages, 1.22 MB].

Young Adults, Student Debt and Economic Well-Being

Young Adults, Student Debt and Economic Well-Being. Pew Research Social & Demographic Trends. Richard Fry. May 14, 2014.

Student debt burdens are weighing on the economic fortunes of younger Americans, as households headed by young adults owing student debt lag far behind their peers in terms of wealth accumulation, according to the analysis of government data. About four-in-ten U.S. households (37%) headed by an adult younger than 40 currently have some student debt–the highest share on record, with the median outstanding student debt load standing at about $13,000. [Note: contains copyrighted material].

[PDF format, 23 pages, 393.57 KB].

Debt Ceiling Redux?

Debt Ceiling Redux? YaleGlobal. James Leitner and Ian Shapiro. February 20, 2014.

U.S. Congress raised the artificial debt ceiling to pay bills without a fuss, but the move may galvanize extremists who want to slow government spending, explain James Leitner. Economists around the globe agree the United States should slow spending and reduce debt, but oppose the crude approach that would destabilize the global economy and hike interest rates. According to the authors, the law may be unconstitutional because it forces government to prioritize spending already approved by Congress, a not-so-transparent backdoor way to eliminate popular programs opposed by conservatives. [Note: contains copyrighted material].

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