2012年-CEPS欧洲政策研究中心_Adjustment_Difficulties_and_Debt_Overhangs_in_the_Eurozone_Periphery_27页_1mb

Summary of "Adjustment Difficulties and Debt Overhangs in the Eurozone Periphery"

Core Content

This paper examines the adjustment difficulties and debt overhangs faced by the peripheral countries of the eurozone, particularly focusing on Greece, Ireland, Portugal, Spain, and Italy (collectively referred to as GIPSY). It highlights the structural challenges these economies face in achieving fiscal and external sustainability, emphasizing the role of capital flows, savings rates, and the implications of the eurozone's monetary union structure.

Main Points

1. Adjustment Difficulties in the Eurozone Periphery

• Greece and Portugal are the most vulnerable due to their:

  • High external debt levels
  • Low national savings rates
  • Relatively closed economies
  • Dependence on external financing

• These countries face solvency problems, not just liquidity issues, requiring:

  • Sharp fiscal adjustment
  • Reduction in domestic consumption
  • Increase in exports (which is unlikely)
  • Long-term internal devaluation (cut in nominal wages)

• Ireland and Spain are less vulnerable:

  • Ireland faces illiquidity due to massive bank losses and high savings rates
  • Spain has a lower debt level and higher savings rate, but is highly exposed to financial markets due to its construction bubble

• Italy appears to have a better starting position:

  • High savings rate and low foreign imbalances
  • However, its domestic savings rate has deteriorated over the past decade

2. Fiscal Adjustment and Its Impact on Output

• Fiscal consolidation has a negative impact on demand via the Keynesian multiplier:

  • Lower savings and trade openness increase the multiplier effect
  • A low trade openness means exports cannot offset domestic demand declines

• The paper provides Keynesian multiplier estimates for the GIPSY group:

  • Greece: 2.5 multiplier, leading to a -31% GDP impact
  • Ireland: 1.3 multiplier, leading to a -14.8% GDP impact
  • Portugal: 1.7 multiplier, leading to a -10.7% GDP impact
  • Spain: 2.0 multiplier, leading to a -16.2% GDP impact
  • Italy: 1.5 multiplier, leading to a -3.3% GDP impact

• Italy is the only country in the GIPSY group where fiscal adjustment is politically feasible due to its smaller adjustment needs

3. Market Irrationality and Capital Flows

• Financial markets provided ample financing to Greece, Ireland, Portugal, Spain, and Italy until the crisis:

  • Nominal GDP growth was high (over 7% for Greece, Ireland, and Spain)
  • Nominal interest rates were low (around 4%)

• The sudden stop of capital inflows in 2009 led to a sharp decline in growth and increase in interest rates, making debt sustainability more challenging

• The snowball effect of debt is a concern when:

  • Growth rates fall below interest rates
  • Public deficits are not offset by increased savings or exports

• Greece is the most affected:

  • Required 20% of GDP as a primary surplus to prevent the debt-to-GDP ratio from rising
  • Current primary deficit is -3.2% of GDP, indicating a large adjustment is needed

• Ireland has a primary deficit of -10.0% of GDP, but due to its high savings rate, the required adjustment is less severe than in Greece

• Portugal and Spain also require significant fiscal adjustments, but their savings rates and growth prospects are better than Greece’s

4. Impact of Risk Premia

• Rising sovereign risk premia have affected both public and private sector borrowing costs

• The ECB's unlimited funding policy has mitigated the impact on domestic interest rates:

  • Banks in Greece and Ireland have received €200 billion in ECB funding
  • This has allowed them to maintain lending despite higher risk premia

• Domestic interest rates have not risen significantly due to ECB interventions:

  • This has created a disconnect between market rates and domestic lending rates
  • The pass-through of higher risk premia to domestic borrowers has been limited

5. Policy Implications

• The adjustment process is likely to be prolonged and painful
• The core countries are willing to support peripheral countries, but sustainability is still at risk
• The risk of sovereign default is increasing, especially for Greece and Portugal
• Italy is in a better position but must avoid further deterioration of its savings rate

Key Information

• The euro crisis began with the revelation of Greek fiscal mismanagement in late 2009
• The Maastricht criteria (3% deficit limit) were not met by most GIPSY countries
• The Keynesian multiplier effect shows that fiscal consolidation can lead to significant GDP contractions
• Capital inflows during the boom created self-fulfilling growth fundamentals
• The financial system, especially banks, played a crucial role in amplifying credit availability
• The sudden stop of capital inflows in 2009 caused a sharp economic downturn
• Risk premia on government debt have increased, making debt sustainability more challenging
• The ECB's support has prevented domestic interest rates from rising, but long-term sustainability remains uncertain

Conclusion

The adjustment required for the GIPSY countries is complex and politically difficult, especially for Greece and Portugal. While the ECB has provided significant support, the structural imbalances and low savings rates in these countries make sustainable recovery unlikely without substantial fiscal and external adjustments. The paper suggests that the risk of sovereign default is increasing, and that financial markets continue to be cautious about the long-term viability of public finances in the eurozone periphery.