Private equity: financial investors, public services, and employment

The report surveys the activity of private equity and other financial investors in the water, waste and healthcare sectors in Europe. It includes the appraisal of a WEF study on employment effects

ECONOMIC CRISIS IN NEW EU MEMBER STATES IN CENTRAL AND EASTERN EUROPE: FOCUSING ON BALTIC STATES

After giving a general view of the economic crisis in new EU member states in Central and Eastern Europe, this paper examines the causes, focusing on Baltic States, especially Latvia. Thanks to the Single Market of the EU, workers in this country became able to migrate to advanced EU countries, especially the UK, decreasing the unemployment rate and at the same time causing a sharp increase in wages due to a tightened labor market. Banks from Nordic countries, Sweden in particular, came to operate in Latvia and competed for market shares, stirring a consumption boom. In a situation in which people can easily get loans denominated in foreign currency, monetary policies of the central bank are of no use. The Latvian economy already showed a sign of overheating in 2005. However, in the spring of 2007, the government turned to restrictive policies, causing depression at the end of 2007. In addition, the Lehman shock dealt the Latvian economy its final blow. Baltic States have shared a common weakness in terms of their development relying heavily on foreign capitals. In the case of Estonia and Lithuania, however, the circumstances in which foreign- owned banks have been overwhelmingly dominating the banking sector benefited these countries. As parent banks of foreign-owned banks coped with difficulties, both countries were able to avoid the worst case scenario. Latvia, which is reconstructing its economy under support from the EU and the IMF, set up the introduction of the euro in 2013 as an exit strategy. Latvia is in dilemma: If the country does not devalue its national currency and tries to satisfy the Maastricht criteria (especially having a budget deficit of less than 3% of the GDP) soon, it will be obliged to adopt pro-cyclical policies, causing economic stagnation. There is a scenario in which the financial crisis in Latvia might cause disorder in the EU economy via the possible collapse of Swedish bank(s), but the likelihood that this will come to pass seems very small.Global financial crisis, EU-Phoria, Central and Eastern Europe, Baltic States, Latvia

Are buybacks back? Menu-driven debt-reduction schemes with heterogenous creditors

There is always some price that is low enough so that a debtor country gains by buying back some of its debts. Similarly, there is always some price that is high enough so that creditors gain by selling their debt claims. What is needed is a mechanism that allows trades to take place at some price within this range. One mechanism, the market buyback, has been called a boondoggle. However, market buybacks are too expensive from the debtor's point of view and faced with a buyback bid, each creditor has incentives to hold onto its claim unless the bid is larger than the value of debt after the deal. Concerted debt-reduction agreements can overcome this type of coordination failure, but they may be difficult to reach in practice because of the heterogeneity of creditors. The authors argue that the menu approach to debt reduction retains the advantages but not the inconvenience of buybacks and concerted agreements. They introduce a model of bank asset pricing in the presence of tax incentives and deposit insurance. They then derive the equilibrium level of exit and new money for a distributionof creditors facing a given menu program. They show that the optimal menu includes some positive level of debt repurchase in almost all cases - challenging the argument that buybacks are undesirable. The authors conclude that the menu program dominates the standard buyback and new money approaches.Banks&Banking Reform,Economic Theory&Research,Financial Intermediation,Financial Crisis Management&Restructuring,Municipal Financial Management

Would collective action clauses raise borrowing costs? - an update and additional results

It is easy to say that the International Monetary Fund should not resort to financial rescue for countries in crisis; this is hard to do when there is no alternative. That is where collective action clauses come in. Collective action clauses are designed to facilitate debt restructuring by the principals - borrowers, and lenders - with minimal intervention by international financial institutions. Despite much discussion of this option, there has been little action. Issues of bonds fear that collective action clauses would raise borrowing costs. The authors update earlier findings about the impact of collective action clauses on borrowing costs. It has been argued that only in the past year or so, have investors focused on the presence of these provisions, and that, given the international financial institutions'newfound resolve to"bail in"investors, they now regard these clauses with trepidation. Extending their data to 1999, the authors find no evidence of such changes, but rather the same pattern as before: Collective action clauses raise the costs of borrowing for low-rated issuers, but reduce them for issuers with good credit ratings. Their results hold both for the full set of bonds and for bonds issued only by sovereigns. They argue that these results should reassure those who regard collective action clauses as an important element in the campaign to strengthen international financial architecture.Economic Theory&Research,International Terrorism&Counterterrorism,Payment Systems&Infrastructure,Banks&Banking Reform,Strategic Debt Management,Financial Intermediation,Environmental Economics&Policies,Strategic Debt Management,Economic Theory&Research,Banks&Banking Reform

Currency Board Arrangement and Transition: The Issues, Controversies and the Experience of Bosnia

In the last decade there has been considerable discussion on what exchange rate policies shall be pursued by developing countries as well as countries in transition as mean of successful transformation and effective mechanism to spur private sector growth and promote stability. the central to this, rather broad and growing debate, has been the role of fixed exchange rates, and the currency board arrangements (cba) in particular.this paper provides a comprehensive analysis of the attractions and disadvantages of such arrangements principally drawing on the experience of bosnia and herzegovina (bih). it assesses merits and costs related to this arrangement, primarily looking at the rigidities and constraints the regime imposes on macroeconomic policies, and the subsequent impact on growth and development. finally, the paper elaborates if and under which conditions, the weaknesses associated with the regime are off set with its repeatedly assigned advantages of i.e. macroeconomic stability, low inflation, increased confidence and established credibility as well as reduced “costs” to business transactions and investments. the paper concludes that bosnian currency board was viable temporary solution and that serious consideration shall be given to exiting the regime. the paper is thought to provide useful insights to policy makers and contribute to the overall monetary and exchange rate debate.currency board arrangement, policy misalignments, transition

Is the Bank-Sovereign Link Truly Severed? Bruges European Economic Policy Briefings 43/2016

This paper examines the degree to which the Banking Recovery and Resolution Directive and the Single Resolution Mechanism Regulation have severed the dependence of banks on sovereigns. We review the cases in which public aid has been granted to banks since the entry into force of the above legislation, as well as outlining the circumstances in which state shareholdings have been bailed-in. We conclude that the current rules on public assistance to banks need revision as they neglect the fact that for some banks the state is already a shareholder. To remedy this, we propose a revision of the Banking Recovery and Resolution Directive and the Single Resolution Mechanism Regulation whereby private shareholdings are bailed-in before public shareholdings, and where contributions by the national resolution funds or the Single Resolution fund are exhausted before state aid is granted

Public-Public Partnerships as a catalyst for capacity building and institutional development: Lessons from Stockholm Vatten’s experience in the Baltic region

This report explores the developmental potential of Public-Public Partnerships in the water sector, in light of Stockholm Vatten's experience in Kaunas, Lithuania and Riga, Latvia

Banking sector (under?) development in Central and Eastern Europe

By introducing a new measure of the banking systems' size, the paper challenges the existing consensus on severe underdevelopment of the CEE banking sectors. We argue that the existing studies on the size of CEE banking systems exaggerate the real degree of underdevelopment because common measures of the size of the banking system produce downward biased results when applied to transition economies. We compare various measures of the size of the CEE banking sectors with those of several 'old' European Union (EU) member countries which are used as benchmarks. The comparison indicates that indeed the banking sectors in the CEE countries lag behind the most developed financial systems in the EU, but are very close to the levels in the financially less developed EU countries

New and timely statistical indicators on government debt securities

New monthly statistical indicators on government debt securities for euro area countries have now been developed on the basis of the information contained in the Centralised Securities Database (CSDB), an internal database available to the European System of Central Banks (ESCB). The CSDB is jointly operated by the ESCB and contains timely and high-quality security-by-security reference data on debt securities, equities and investment funds. The new indicators on government debt securities provide an indication of the expected disbursements made for the servicing of issued debt securities together with the associated interest rate (nominal yield), broken down by country, original and remaining maturity, currency and type of coupon rate. This paper describes in detail the newly compiled statistical information and thus contributes to further describing the euro area government bond markets. The new indicators on euro area government debt securities are also highly relevant for policy-making and monetary and fiscal analyses. They indicate that, as at December 2014, the debt service scheduled for such securities in 2015 stood at approximately 15.9% of GDP (€1.6 trillion). This is associated with an average nominal yield on outstanding government debt securities for the euro area as a whole of 3.1% per annum. Both of these indicators have followed a decreasing path in recent periods. The new indicators also reveal some heterogeneity within the euro area: Italy shows the highest debt service and Luxembourg the lowest, while the debt securities issued by Germany have the lowest average nominal yield and Lithuanian ones the highest