Eurozone Debt Crisis com

8/8/2019 Eurozone Debt Crisis com

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- 1 -Prof. Dr. Rainer Maure

RAINERMAURER,Pforzheim

- 1 -Prof. Dr. Rainer Maurer

Digression:Digression:The Eurozone Debt Crisis 2010The Eurozone Debt Crisis 2010


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Digression:The Eurozone Debt Crisis 2010


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The Return of the Interest Rate Spreads : After the foundation of the European Monetary Union (EMU)

interest rates spreads between the member states nearlydisappeared .

By the end of the year 2008, interest rate spreads reappeared .

For some countries interest rate spreads have become large :

The Eurozone Debt Crisis 2010The Eurozone Debt Crisis 2010


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0%

1%

2%

3%4%

5%

6%

7%

8%

9%10%

Jan. 99 Jan. 00 Jan. 01 Jan. 02 Jan. 03 Jan. 04 Jan. 05 Jan. 06 Jan. 07 Jan. 08 Jan. 09 Jan. 10

10Y Government Bond Interest Rate Germany (left scale) Interest Spread compared to Germany (left scale)

SpainInterest Rate Spread

Source: Eurostat, Central Bank of Spain, Own Calculationswww.rainer-maurer.co

Interest Rate

2,0%



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0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%



IrelandInterest Rate Spread

Source: Eurostat, Own Calculations www.rainer-maurer.com

Interest Rate

2,5%



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0%

1%

2%

3%4%

5%

6%

7%

8%

9%

10%



PortugalInterest Rate Spread

Source: Eurostat, Central Bank of Portugal, Own Calculationswww.rainer-maurer.co

Interest Rate

3,4%



7/38- 7 -Prof. Dr. Rainer Maure


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%



GreeceInterest Rate Spread

Source: Eurostat, Own Calculations www.rainer-maurer.co

Interest Rate

6,9%





What caused the crisis? Increasing public and private debt positions

....have casted doubt on the ability of governments and bankssafeguarded by governments to pay back debt.

Investors fear of a default of governments on their debt and....demand therefore a higher risk premiums .





0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Jan. 99 Jan. 00 Jan. 01 Jan. 02 Jan. 03 Jan. 04 Jan. 05 Jan. 06 Jan. 07 Jan. 08 Jan. 09 Jan. 100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%


Total Country Int. Net Debt Posi tion GDP Ratio Total Government Debt GDP-to-Ratio

SpainInterest Rate Spread and Debt-to-GDP Ratios

Source: Eurostat, Central Bank of Spain, Own Calculations www.rainer-maurer.com

Interest Rate Debt-to-GDP





0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Jan. 99 Jan. 00 Jan. 01 Jan. 02 Jan. 03 Jan. 04 Jan. 05 Jan. 06 Jan. 07 Jan. 08 Jan. 09 Jan. 10-60%

-50%

-40%

-30%

-20%-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%



IrelandInterest Rate Spread and Debt-to-GDP Ratios







0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%


10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%



PortugalInterest Rate Spread and Debt-to-GDP Ratios

Source: Eurostat, Central Bank of Portugal, Own Calculations www.rainer-maurer.com


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%


10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%



PortugalInterest Rate Spread and Debt-to-GDP Ratios

Source: Eurostat, Central Bank of Portugal, Own Calculations www.rainer-maurer.com






0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%


10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%



GreeceInterest Rate Spread and Debt-to-GDP Ratios





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Digression: The constant debt-to-GDP ratio budget surplus:

Debt-to-income ratio:

1st derivation with respect to time:

Increase of debt = Primary Deficit + Interest Payments

2dtdY

dtdD

YDY

dtdk =

YD

k =

dtdD B= D*i+





1st derivation with respect to time: 2dtdY

dtdD

YDY

dtdk =

2dtdY

YDY)D*iB(

dtdk +=

YD

YYDi

YB

dtdk dtdY+= =

YD

Yi

YB

dtdk dtdY

+=

=

=>YD

Yi

YB dtdY0

dtdk =

Condition for a constant debt-income-ratio: dk / dt = 0 !





YD

Yi

YB dt

dY

If GDP growth is smaller thanthe interest rate, a countrymust run a primary currentaccount surplus to keep the

debt-GDP-ratio constant!





YD

Yi

YB dt

dY

If GDP growth is larger thanthe interest rate, a country can run a primary current accountdeficit to keep the debt-GDP-

ratio constant!




Applying this formula to the data of the countries shows thattheir actual account surplus is far away from the surplus necessary to keep their debt-to-GDP ratio constant :





-15%

-10%

-5%

0%

5%

10%

15%


-15%

-10%

-5%

0%

5%

10%

15%

Constant Intern. Net Debt-to-GDP Ratio Current Account Surplus (right scaActual Current Account Surplus

SpainCurrent Account Surplus Gap

Source: Eurostat, Own Calculations www .rainer-maurer.co

Percent of GDP

Current account surplus necessary to stabilize theInternational Debt-to-GDP ratio is 7,5% of GDP .


Acutal current account surplus - 5,5% of GDP !

=> Current account surplus gap = 13 % of GDP !





-15%

-10%

-5%

0%

5%

10%

15%


-15%

-10%

-5%

0%

5%

10%

15%

Constant International Net Debt-to-GDP Ratio Current Account Surplu

Actual Current Account Surplus

PortugalCurrent Account Surplus Gap


Percent of GDP

Current account surplus gap = 18,5 % of GDP !





-15%

-10%

-5%

0%

5%

10%

15%


-15%

-10%

-5%

0%

5%

10%

15%

Constant International Net Debt-to-GDP Ratio Current Account Surplus


IrelandCurrent Account Surplus Gap

Source: Eurostat, O wn Calculations www.rainer-maurer.co

Percent of GDP

Current account surplus gap = 15 % of GDP !


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-15%

-10%

-5%

0%

5%

10%

15%


-15%

-10%

-5%

0%

5%

10%

15%

Constant International Net Debt-to-GDP Ratio Current Account Surplus


GreeceCurrent Account Surplus Gap

Source: Eurostat, Own Calculations www .rainer-maurer.co

Percent of GDP

Current account surplus gap = 25 % of GDP !


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Austria

Belgium

Cyprus

Germany

Spain

FinlandFrance

Greece

Ireland

Italy

Luxembourg

Malta

Netherlands

Portugal

Slovenia

Slovakia

United Kingdom

3,0%

3,5%

4,0%

4,5%

5,0%

5,5%

6,0%

-15% -10% -5% 0% 5% 10% 15% 20%

Constant IDP-to-GDP Ratio C urrent Account Surplus Ga

Correlation Coefficient: 70,1%


Interest Rates (Average: Sept. 2009 - May 2010) and Constant International DebtPosition-to-GDP Ratio Primary Current Account Gap (Average: Jan. 2009 - Aug. 2009

Nominal InterestRates 10Y Bonds

The larger the

current accountgap , the higher therisk premium!



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AustriaBelgium

Cyprus

Germany

Spain

Finland France

Greece

Ireland

Italy

Luxembourg

Malta

Netherlands

Portugal

Slovenia

Slovakia

United Kingdom

3,0%

3,5%

4,0%

4,5%

5,0%

5,5%

6,0%

-2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Interest Rates (Average: Sept. 2009 - May 2010) and Constant Government Debt-to-GDP Ratio Primary Government Budget Gap (Average: Jan. 2009 - Aug. 2009)

Nominal InterestRates 10Y Bonds

Constant Gov. Debt-to-GDP Ratio Gov. Budget Ga

Correlation Coefficient: 65,4%


The larger thegovernment budgetgap , the higher the

risk premium!



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The situation is precarious !

How to get out of this???

To help countries like Greece, Portugal, Spain and Irelandtheir " Current Account Gap" must be reduced :

DepressedEMU


t

t

t

t

t

dtdY

tt

to

YB

YD

Yi

YB

YB t

=


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Special problem of indebted countries , which are member states of a monetary union :

1. They have no own currency they can depreciate to improvetheir current account:

2. They have no own currency to inflate away debt !

e $ => P e $ => ( EX IM ) < P $

Reduction of currentaccount gap!


Digression: How to "inflate away" government debt ???


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- 27 -Prof. Dr. Rainer Maurer

Digression: How to inflate away government debt ???

The present value (=PV t,T=market value) of government debtwith a face value of 1 is given by the formula:

If the market interest rate i t,T=2% is equal to fixed interest rate of governmentdebt z t,T=2%, the market value is equal to the face value = 1:

If an increase of inflation by 3% increases the nominal market interest rate

(=real interest rate + inflation rate) by 3% and the average maturity of government debt is T=10 years, the market value of government debt falls bynearly one quarter:

TT,tT,t

TT

T,tT,t )i1(

1iz

)i1(11PV

++

+=

1)%21(

1%2%2

)%21(1

1PV TT,tT,t

TT

T,tT,t =++

+=

The Dark

Corners of Fiscal Policy

77,0)%51(

1%5%2

)%51(1

1PV 10T,tT,t

T10

T,tT,t =++

+=

Create a little bit

inflation andbuy back

your debt !


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Special problem of member states of a monetary union :

3. Leaving the monetary union will cause the countries debtposition to explode !!!

If Greece would leave the eurozone:Its new currency (the Neodrachmae) will depreciate againstthe Euro: e Neodramae

However, Greek government bonds (as well as private debt)are denominated in Euro D

!

The Greek debt measured in Neodramae will grow in case of a depreciation:

DNeodramae = D / e Neodramae

( )



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How has it come to this?

The EMU is a monetary union across countries which haveasynchronous business cycles :

-8%-7%-6%-5%-4%-3%-2%-1%0%1%2%3%

4%5%6%7%8%

2 0 0 0 Q 0 1

2 0 0 0 Q 0 3

2 0 0 1 Q 0 1

2 0 0 1 Q 0 3

2 0 0 2 Q 0 1

2 0 0 2 Q 0 3

2 0 0 3 Q 0 1

2 0 0 3 Q 0 3

2 0 0 4 Q 0 1

2 0 0 4 Q 0 3

2 0 0 5 Q 0 1

2 0 0 5 Q 0 3

2 0 0 6 Q 0 1

2 0 0 6 Q 0 3

2 0 0 7 Q 0 1

2 0 0 7 Q 0 3

2 0 0 8 Q 0 1

2 0 0 8 Q 0 3

2 0 0 9 Q 0 1

2 0 0 9 Q 0 3

-0,020

-0,015

-0,010

-0,005

0,000

0,005

0,010

0,015

0,020

Germany (left scale)USA (left scale)Standard Deviation without Cyprus, Malta, Slovenia, Slovakia, USA (right scale)

GDP Gaps of ECU Member States and the USA(Trend Deviation of GDP in Percent of Trend measured by Hodrick-Prescott-Filter)

Source: Eurostat, Own www.rainer-maurer.comGDP Gap = Actual GDP minus trend GDP in % of trend GDP



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How has it come to this?

As a result, inflation rates across the EMU member state aretypically quite different :


100%

105%

110%

115%

120%

125%

130%

1 9

9 9

2 0

0 0

2 0

0 1

2 0

0 2

2 0

0 3

2 0

0 4

2 0

0 5

2 0

0 6

2 0

0 7

2 0

0 8

2 0

0 9

Euro area (16 countries) Ireland Greece Spain Portugal

GDP Price Deflator Relative to GermanyIndices Relative to Germany (1999 = 100%)

Source: EU Commis sion, AMECO, Own Calculations www.rainer- maurer.com


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How has it come to this? The European Central Bank can set only one main refinancing

rate .

Therefore, after the start of the EMU, nominal interest rates across the eurozone converged .

However, convergence of nominal interest rate and differentcountry-specific interest rates causes a divergence of realinterest rates !

=> Countries with a high inflation rate have low real interest rates!

Countries with a low inflation rate have high real interest rates!

InflationInterest NominalInterestReal == i r



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How has it come to this? Convergence of nominal interest rate & divergence of real

interest rates:


-0,1%

0,1%

0,3%

0,5%

0,7%

0,9%

1,1%

1,3%

1,5%

J an. 97 Jan. 9 8 Jan. 99 Ja n. 00 J an. 0 1 J an. 0 2 J an. 0 3 J an. 0 4 J an. 05 J an. 0 6 Jan. 0 7 Ja n. 08 Ja n. 09 J an. 1 0

Nominal Interest Rates for 10-Year Government BondsInflation Rates (HCPI)Real Interest Rates for 10-Year Government Bonds

Variance Coefficients across the 12 EMU Founding Member States

Source: Eurostat Own Calculations www.rainer-maurer.com


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How has it come to this? Real interest rates compared to Germany:


-4,0%

-3,0%

-2,0%

-1,0%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

9,0%

J an. 9 7 Ja n. 98 J an. 99 Ja n. 0 0 J an. 01 Ja n. 02 Ja n. 03 J an. 0 4 J an. 05 J an. 06 Jan. 07 Ja n. 0 8 Ja n. 0 9 J an. 10

Germany Spain Greece Ireland Portugal

Real Interest Rates for 10 Years Government Bonds (based on BIP-Deflator)



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How has it come to this? Real interest rates and net international debt position:


Portugal

Netherlands

Italy

Ireland

Greece

France

Finland

Spain

GermanyBelgium

Austria

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

1,3% 1,5% 1,7% 1,9% 2,1% 2,3% 2,5% 2,7%

December 2009 Accumulated Net Debt Position in Percent of GDPand Average Real Interest Rate from Januar 1999 to December 2009

Real Interest Rate

Quelle: Eurostat, Eigene Berechnungen www.rainer-maurer.com

Net Debt Position in % of GDPin % of GDP


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How has it come to this? Inflation rates and net international debt position:


Portugal

Netherlands

Italy

Ireland

Greece

FranceFinland

Spain

GermanyBelgium

Austria

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

1,4% 1,6% 1,8% 2,0% 2,2% 2,4% 2,6% 2,8% 3,0% 3,2%

December 2009 Accumulated Net Debt Position in Percent of GDPand Average HCPI Price Index from Januar 1999 to December 2009

Inflation Rate

Net Debt Position in % of GDPin % of GDP

Quelle: Eurostat, Eigene Berechnungen www.rainer-maurer.com


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0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10

0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10

How has it come to this? Consequently, high inflation countries experienced on average

lower real interest rates than low inflation countries:


Low inflation country:r L*= i*- L

Excess Supply

S(Y)

I(Y)

S, I

r

r L*

High inflation country:r H*= i*- H

Excess Demand

S(Y)

I(Y)

r

r H*

S, I

The integrated EMU capital market is in equilibrium, whilethere is a disequilibrium in single countries!

r *


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How has it come to this? Countries with high inflation rates built up a net international

debt position . Countries with low inflation rates built up a net international

wealth position .


-1500

-1000

-500

0

500

1000

1500

Jan. 98 Jan. 99 Jan. 00 Jan. 01 Jan. 02 Jan. 03 Jan. 04 Jan. 05 Jan. 06 Jan. 07 Jan. 08 Jan. 09 Jan. 10

Sum of Net International Debt Position of Spain, Greece, Ireland, Portugal

Sum of Net International Debt Position of Germany, Belgium, Luxembourg, Netherlands


International Net Debt Position of Eurozone Debtor and Creditor Countries

Bn. Euro


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How has it come to this? Consequently, the eurozone debt crisis is not by chance ! It is caused by a design faulty of the EMU ! What can be done to built a more stable EMU ?

4.2. Financial Market Crises4.2. Financial Market Crises4.2.5. The Eurozone Debt Crisis 20104.2.5. The Eurozone Debt Crisis 2010

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Eurozone Debt Crisis com