Ricardian Equivalence, Foreign Debt and Sovereign Default Risk
Stefan Eichler, Ju Hyun Pyun
Journal of Economic Behavior and Organization,
May
2022
Abstract
We study the impact of sovereign solvency on the private-public savings offset. Using data on 80 economies for 1989–2018, we find robust evidence for a U-shaped pattern in the private-public savings offset in sovereign credit ratings. While the 1:1 savings offset is observed at intermediate levels of sovereign solvency, fiscal deficits are not offset by private savings at extremely low and high levels of sovereign solvency. Particularly, the U-shaped pattern is more pronounced for countries with high levels of foreign ownership of government debt. The U-shaped pattern is an emerging market phenomenon; additionally, it is confirmed when considering foreign currency rating and external public debt, but not for domestic currency rating and domestic public debt. For considerable foreign ownership of sovereign bonds, sovereign default constitutes a net wealth gain for domestic consumers.
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Economy in Shock — Financial Policy is Holding Up
Oliver Holtemöller, Stefan Kooths, Claus Michelsen, Torsten Schmidt, Timo Wollmershäuser
Wirtschaftsdienst,
No. 4,
2020
Abstract
According to the leading German economic research institutes, the German economy is experiencing a drastic slump as a result of the corona pandemic. In order to slow down the wave of infection, the state has severely restricted economic activity in Germany. As a result, GDP is expected to shrink by 4.2% this year. The recession is leaving clear traces on the labour market and the national budget. At its peak, the unemployment rate will soar to 5.9% and the number of short-time workers to 2.4 million. This year, the fiscal policy stabilisation measures will lead to a record deficit in the general government budget of 159 billion euro. After the shutdown, the economy will gradually recover. Accordingly, the increase in GDP next year will be strong at 5.8%. This forecast is associated with considerable downside risks, e.g. because the pandemic can be slowed faster or because the recovery of economic activity will be less successful than expected or there may be a new wave of infection.
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Cross-border Transmission of Emergency Liquidity
Thomas Kick, Michael Koetter, Manuela Storz
Journal of Banking and Finance,
April
2020
Abstract
We show that emergency liquidity provision by the Federal Reserve transmitted to non-U.S. banking markets. Based on manually collected holding company structures, we identify banks in Germany with access to U.S. facilities. Using detailed interest rate data reported to the German central bank, we compare lending and borrowing rates of banks with and without such access. U.S. liquidity shocks cause a significant decrease in the short-term funding costs of the average German bank with access. This reduction is mitigated for banks with more vulnerable balance sheets prior to the inception of emergency liquidity. We also find a significant pass-through in terms of lower corporate credit rates charged for banks with the lowest pre-crisis leverage, US-dollar funding needs, and liquidity buffers. Spillover effects from U.S. emergency liquidity provision are generally confined to short-term rates.
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Industry in Recession — Growth Forces Dwindle
Claus Michelsen, Oliver Holtemöller, Torsten Schmidt, Stefan Kooths, Timo Wollmershäuser
Wirtschaftsdienst,
No. 10,
2019
Abstract
The leading German economic research institutes have revised their economic forecast for Germany significantly downwards. The reasons for the weak development are the declining global demand for capital goods, which the German economy specialises in exporting, political uncertainty and structural changes in the automotive industry. Fiscal policy, on the other hand, is supporting macroeconomic expansion. Future development depends to a large extent on whether the trade conflicts can be resolved and how Brexit is structured.
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The Case for a European Rating Agency: Evidence from the Eurozone Sovereign Debt Crisis
Marc Altdörfer, Carlos A. De las Salas Vega, Andre Guettler, Gunter Löffler
Journal of International Financial Markets, Institutions and Money,
2019
Abstract
Politicians frequently voice that European bond issuers would benefit from the presence of a Europe-based rating agency. We take Fitch as a prototype for such an agency. With its ownership structure and a headquarter in London, Fitch is more European than Moody’s and S&P; during the Eurozone sovereign debt crisis, it also issued more favorable ratings. Fitch’s rating actions, however, were largely ignored by the bond market. Our results thus cast doubt on the benefits of a European credit rating agency.
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A Market-based Measure for Currency Risk in Managed Exchange Rate Regimes
Stefan Eichler, Ingmar Roevekamp
Journal of International Financial Markets, Institutions and Money,
November
2018
Abstract
We introduce a novel currency risk measure based on American Depositary Receipts (ADRs). Using an augmented ADR pricing model, we exploit investors’ exposure to potential devaluation losses to derive an indicator of currency risk. Using weekly data for a sample of 807 ADRs located in 21 emerging markets over the 1994–2014 period, we find that a deterioration in the fiscal balance and higher inflation increase currency risk. Interaction models reveal that the fiscal balance and inflation drive the determination of currency risk for countries with poor sovereign rating, low foreign reserves, low capital account openness and managed float regimes.
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Upturn Loses Momentum – World Economic Climate Grows Harsher
Roland Döhrn, Oliver Holtemöller, Stefan Kooths, Claus Michelsen, Timo Wollmershäuser
Wirtschaftsdienst,
No. 10,
2018
Abstract
The economic upturn in Germany is entering its sixth year but is losing momentum due to both demand and supply side factors. On the one hand, Germany’s key sales markets have weakened in line with the slowdown in world trade. On the other hand, a growing number of firms face production side bottlenecks, especially in terms of labour and sourcing intermediate goods. This coincides with problems in the automotive industry related to the introduction of the new World Harmonised Light Vehicle Test Procedure (WLTP), which has affected gross domestic product (GDP) growth due to the branch’s economic weight. These adjustment problems, however, should be overcome over the course of the winter. Fiscal stimuli will also take effect as of the beginning of 2019. After 1.7 % growth this year, GDP will increase at rates of 1.9 % in 2019 and 1.8 % in 2020.
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Crises and Rescues: Liquidity Transmission Through Global Banks
Michael Koetter, Claudia M. Buch, C. T. Koch
International Journal of Central Banking,
No. 4,
2018
Abstract
This paper shows that global banks transmit liquidity shocks via their network of foreign affiliates. We use the (unexpected) access of German banks' affiliates located in the United States to the Federal Reserve's Term Auction Facility. We condition on the parent banks' U.S. dollar funding needs in order to examine how affiliates located outside the United States adjusted their balance sheets when the U.S. affiliate of the same parent tapped into TAF liquidity. Our research has three main findings. First, affiliates tied to parents with higher U.S. dollar funding needs expanded their foreign assets during periods of active TAF borrowing. Second, the overall effects are driven by affiliates located in financial centers. Third, U.S.- dollar-denominated lending particularly increased in response to the TAF program.
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Expansion Continues to Be Strong
Roland Döhrn, Ferdinand Fichtner, Oliver Holtemöller, Stefan Kooths, Timo Wollmershäuser
Wirtschaftsdienst,
No. 10,
2017
Abstract
The business cycle upswing in Germany has gained strength and breadth. In addition to private consumption, the expansion is now also supported by investment and foreign trade. The latter benefits from growing exports to the euro area, where the economy is gaining momentum. Since the euro area upswing rests on solid fundamentals, the ECB should be able to start tapering without putting the economy at risk.
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