Reliance on capital inflows combined with forthcoming changes in European banking regulations leave central and eastern Europe countries extremely vulnerable.
Capital inflows were larger in emerging Europe and fell more severely during the crisis than in other emerging economies. A substantial share of these flows were cross-border loans from western European parent banks to their emerging European affiliates.
These inflows created macroeconomic and financial sector vulnerabilities — larger current account deficits, rapid credit growth, worse fiscal positions, and heavier indebtedness (often in foreign currencies) of households in a large part of the region. Read more
Developing a sovereign debt crisis management regime should be at the top of the G20’s agenda.
As Carmen Reinhart and Kenneth Rogoff show in This Time is Different: Eight Centuries of Financial Folly banking crises are often followed by sovereign debt crises. Europe’s debt crisis might be topping the headlines now, but the problem won’t end here.
Reinhart and Rogoff find that the debt/GDP threshold where nations slip into crises has historically been 30-35 per cent of GDP. According to the World Bank more than 60, mostly developing, countries reached that threshold in 2008. A 2009 IMF report, which examined 71 low-income countries, suggested 28 of the poorest nations are at high risk of debt crises. Read more
Prime minister David Cameron on Monday warned that public sector pay, pensions and state benefits would face a squeeze as he prepared the UK for the “painful times ahead” as the government deals with the £156bn deficit. Martin Wolf, the FT’s chief economics commentator, says the government must set out its plan to eliminate the economy’s structural deficit, but there is a serious risk that if the cuts are too brutal the country could return to recession.
A conversation between Martin Wolf, the FT’s chief economic commentator, and Richard Haass of the Council on Foreign Relations, a leading US thinktank, on the eurozone crisis and its implications for the US and the rest of the global economy.