Souvlaki connection; reflections on the Greek crisis

After the subprime credit crisis of 2007, the world is no longer what we thought. An unprecedented crisis of confidence was combined with a credit crunch, and the G20 countries had to enact massive public spending programmes to save the economy and at least buffer the inevitable hard landing. In 2010 this excessive public spending produced the first public debt crisis in the wake of the subprime crisis: Greece reported that in 2009 it had run an unprecedented deficit of 15.4 per cent of GDP, and that its public debt had skyrocketed to 126.8 per cent. The Greek crisis is the product of years of recession, the sluggish economic environment and poor productivity – but above all it is the product of the mismanagement of the public finances and of unsatisfactory reporting practices. In this essay we analyse this crisis in the context of the era of financial derivatives and underscore a number of crucial effects that have been largely ignored in both academic discussion and public debate.Greek sovereign debt crisis; European financial crisis

The impact on the U.S. Dollar of the conflict between the American locomotive’s model and the emerging economies’ autopoietic growth.

The purpose of this paper is to put the future of the US dollar into a logical framework which comprises the global development mechanism. Two models of growth collide: the US «locomotive», based on the international use of the dollar, and which requires exogenous pushes coming permanently from the foreign deficit and periodically from the public deficit, and the «endogenous», or «autopoietic». The engine of autopoietic growth is the process of globalization, alimented by foreign investments and the emerging economies’ domestic demand, which in turn require the establishment of an international monetary standard. In absence of a real international cooperation, the conflict of the two models might bring a global currency crisis and a fall in the global growth rate, with a possible negative impact in foreign relations and policies at the global level.International monetary system, Dollar, Euro, Exchange rate, Economic growth, International Finance, International Political Economy.

Derivatives, Fiscal Policy and Financial Stability

The massive use of derivatives and securitisation by sovereign States for public debt and deficit management is a growing phenomenon in financial markets. Financial innovation can modify risks effectively run and alter the stability of the public sector finance. The experience of some developed and developing countries is surveyed to look at main instruments used and aims of public finance. Financial stability of the public sector is analysed considering financial innovation use. The case of Italy and its scarce disclosure of information are presented. An IS-LM model is used to capture the effect of financial innovation on fiscal policy for high indebted (European) industrialised countries, with deficit constraints, starting from Blanchard (1981). The use of financial innovation can have various effects over debt and deficit management, given binding external burden (like the European criteria) as far as risks are properly considered, expectations of fiscal policy are coherent with that of markets, and no exogenous shock occurs.fiscal policy; financial stability; derivatives and securitisation

The Impact of the Stability and Growth Pact on Real Economic

The recession under way in the European Union and the threat of deflation have spawned increasing frequent calls for modification of the Stability and Growth Pact. The present article confirms the negative correlation of the rate of real output growth with that of increase in current public expenditure, but finds a positive correlation of growth with the rate of increase in public capital spending, private investment, tax to GDP ratio, and an indicator of the net profit rate. The policy prescription is for the urgent modification of the rules of the Pact, exempting public investment from its constraints subject to the assessment of the Ecofin Council. The markets would be receptive to such a change if the EU instituted clear new rules, not just reinterpreting those now in being under the pressure of contingent factors. On this basis, we find that Italy's economic crisis is due in part to the misconceived fiscal and monetary policy rules of the European Union.Stability Pact, Fiscal Rules, European Union, Ricardian Equivalence

Derivatives, Fiscal Policy and Financial Stability

The massive use of derivatives and securitisation by sovereign States for public debt and deficit management is a growing phenomenon in financial markets. Financial innovation can modify risks effectively run and alter the stability of the public sector finance. The experience of some developed and developing countries is surveyed to look at main instruments used and aims of public finance. Financial stability of the public sector is analysed considering financial innovation use. The case of Italy and its scarce disclosure of information are presented. An IS-LM model is used to capture the effect of financial innovation on fiscal policy for high indebted (European) industrialised countries, with deficit constraints, starting from Blanchard (1981). The use of financial innovation can have various effects over debt and deficit management, given binding external burden (like the European criteria) as far as risks are properly considered, expectations of fiscal policy are coherent with that of markets, and no exogenous shock occursThe massive use of derivatives and securitisation by sovereign States for public debt and deficit management is a growing phenomenon in financial markets. Financial innovation can modify risks effectively run and alter the stability of the public sector finance. The experience of some developed and developing countries is surveyed to look at main instruments used and aims of public finance. Financial stability of the public sector is analysed considering financial innovation use. The case of Italy and its scarce disclosure of information are presented. An IS-LM model is used to capture the effect of financial innovation on fiscal policy for high indebted (European) industrialised countries, with deficit constraints, starting from Blanchard (1981). The use of financial innovation can have various effects over debt and deficit management, given binding external burden (like the European criteria) as far as risks are properly considered, expectations of fiscal policy are coherent with that of markets, and no exogenous shock occursArticles published in or submitted to a Journal without I

Rules of Thumb for Banking Crises in Emerging Markets

This paper employs a recent statistical algorithm (CRAGGING) in order to build an early warning model for banking crises in emerging markets. We perturb our data set many times and create “artificial” samples from which we estimated our model, so that, by construction, it is flexible enough to be applied to new data for out-of-sample prediction. We find that, out of a large number (540) of candidate explanatory variables, from macroeconomic to balance sheet indicators of the countries’ financial sector, we can accurately predict banking crises by just a handful of variables. Using data over the period from 1980 to 2010, the model identifies two basic types of banking crises in emerging markets: a “Latin American type”, resulting from the combination of a (past) credit boom, a flight from domestic assets, and high levels of interest rates on deposits; and an “Asian type”, which is characterized by an investment boom financed by banks’ foreign debt. We compare our model to other models obtained using more traditional techniques, a Stepwise Logit, a Classification Tree, and an “Average” model, and we find that our model strongly dominates the others in terms of out-of-sample predictive power

Souvlaki connection; reflections on the Greek crisis

After the subprime credit crisis of 2007, the world is no longer what we thought. An unprecedented crisis of confidence was combined with a credit crunch, and the G20 countries had to enact massive public spending programmes to save the economy and at least buffer the inevitable hard landing. In 2010 this excessive public spending produced the first public debt crisis in the wake of the subprime crisis: Greece reported that in 2009 it had run an unprecedented deficit of 15.4 per cent of GDP, and that its public debt had skyrocketed to 126.8 per cent. The Greek crisis is the product of years of recession, the sluggish economic environment and poor productivity – but above all it is the product of the mismanagement of the public finances and of unsatisfactory reporting practices. In this essay we analyse this crisis in the context of the era of financial derivatives and underscore a number of crucial effects that have been largely ignored in both academic discussion and public debate