Several prominent economists have pointed out that some of the troubled countries in the Eurozone periphery may need to restructure their sovereign debts as soon as possible. Although debt restructuring will probably not spare these countries from a period of economic austerity and stagnation, it will at least provide some hope for the medium-term future. After some of the burden of the debt has been lifted, these countries will be able to channel more resources to economic recovery and will become more attractive destinations for investors. And, in any case, the sovereign debt of some of these countries, especially Greece, has reached such proportions that it is hard to see how it can be repaid without a significant restructuring.
It is thus particularly surprising that with the possible exception of Ireland, governments in the Eurozone periphery seem to be rather reluctant to discuss the possibility of debt restructuring, or are even outright hostile to such a prospect. So, an important question arises: Why don’t some peripheral countries push more aggressively for a debt restructuring deal? Or, in a more extreme scenario, why do they sometimes appear to oppose restructuring even more strongly than their lenders? For example, it seems that Germany, which is a creditor country, may be more supportive of debt restructuring than some of the debtor countries. A possible answer may lie in two important political economy features.
First, as a recent empirical study by two International Monetary Fund economists, Eduardo Borensztein and Ugo Panizza, shows, a sovereign default usually carries a significant political cost. A sovereign default and restructuring may temporarily cause economic or political upheaval which translates into a substantial loss of electoral support for the party in power. This may lead to conflicts of interest since a governing party may have an incentive to delay default and restructuring (even when such a restructuring seems unavoidable) for as long as possible. Thus according to these findings, what is good for a governing political party is not necessarily good for the country.
Second, some governments in the European South invoke the possibility of a domestic banking crisis in the case of a sovereign debt restructuring; since a country’s banks often hold significant amounts of domestic government debt (or, in other cases, may need to be directly supported through government debt), they may face collapse should the government refrain from paying down its entire debt. However, such an argument is too pessimistic because it confuses bank institutions with bank shareholders and creditors. It is mainly bank institutions, rather than shareholders and creditors, that are important to the health of an economy.
Thus in a sovereign debt restructuring, a peripheral government, possibly together with the European Union, could ensure the viability of distressed domestic banks (if any) without necessarily bailing out shareholders and creditors; this outcome would not be unfair since it was the shareholders and creditors that chose to invest in bad debt in the first place. The costs of such a limited rescue would probably be within reasonable limits. Unfortunately, it seems that several governments tend to confuse bank institutions with bank shareholders and creditors, adopting policies that may be good for the latter, but are not necessarily optimal for the rest of the economy.
Overall, the Euro crisis, which is very complicated and difficult to deal with in the first place, may have been aggravated by a possible misalignment of political incentives in the Eurozone periphery. Peripheral countries need to make a greater effort to come up with clearly defined policies that serve their national interests. Only then will they be able to negotiate efficient and mutually beneficial rescue deals with the European Union, contributing to the economic recovery of Europe.
Source: www.neurope.eu
It is thus particularly surprising that with the possible exception of Ireland, governments in the Eurozone periphery seem to be rather reluctant to discuss the possibility of debt restructuring, or are even outright hostile to such a prospect. So, an important question arises: Why don’t some peripheral countries push more aggressively for a debt restructuring deal? Or, in a more extreme scenario, why do they sometimes appear to oppose restructuring even more strongly than their lenders? For example, it seems that Germany, which is a creditor country, may be more supportive of debt restructuring than some of the debtor countries. A possible answer may lie in two important political economy features.
First, as a recent empirical study by two International Monetary Fund economists, Eduardo Borensztein and Ugo Panizza, shows, a sovereign default usually carries a significant political cost. A sovereign default and restructuring may temporarily cause economic or political upheaval which translates into a substantial loss of electoral support for the party in power. This may lead to conflicts of interest since a governing party may have an incentive to delay default and restructuring (even when such a restructuring seems unavoidable) for as long as possible. Thus according to these findings, what is good for a governing political party is not necessarily good for the country.
Second, some governments in the European South invoke the possibility of a domestic banking crisis in the case of a sovereign debt restructuring; since a country’s banks often hold significant amounts of domestic government debt (or, in other cases, may need to be directly supported through government debt), they may face collapse should the government refrain from paying down its entire debt. However, such an argument is too pessimistic because it confuses bank institutions with bank shareholders and creditors. It is mainly bank institutions, rather than shareholders and creditors, that are important to the health of an economy.
Thus in a sovereign debt restructuring, a peripheral government, possibly together with the European Union, could ensure the viability of distressed domestic banks (if any) without necessarily bailing out shareholders and creditors; this outcome would not be unfair since it was the shareholders and creditors that chose to invest in bad debt in the first place. The costs of such a limited rescue would probably be within reasonable limits. Unfortunately, it seems that several governments tend to confuse bank institutions with bank shareholders and creditors, adopting policies that may be good for the latter, but are not necessarily optimal for the rest of the economy.
Overall, the Euro crisis, which is very complicated and difficult to deal with in the first place, may have been aggravated by a possible misalignment of political incentives in the Eurozone periphery. Peripheral countries need to make a greater effort to come up with clearly defined policies that serve their national interests. Only then will they be able to negotiate efficient and mutually beneficial rescue deals with the European Union, contributing to the economic recovery of Europe.
Source: www.neurope.eu
No comments:
Post a Comment