Rating Sovereign Debt in a Monetary Union Original Sin by Transnational Governance

2014 ◽  
Author(s):  
Finn Marten KKrner ◽  
HanssMichael Trautwein
Keyword(s):  
Monetary Union ◽  
Sovereign Debt ◽  
Original Sin ◽  
Transnational Governance

Rating sovereign debt in a monetary union – original sin by transnational governance

2015 ◽  
Vol 16 (3) ◽  
pp. 253-283 ◽  
Author(s):  
Finn Marten Körner ◽  
Hans-Michael Trautwein
Keyword(s):  
Monetary Union ◽  
Public Debt ◽  
Sovereign Debt ◽  
Foreign Currency ◽  
Debt Crisis ◽  
Emerging Market ◽  
Original Sin ◽  
Risk Assessments ◽  
Content Type ◽  
Local Currency

Purpose – The purpose of this paper is to test the hypothesis that major credit rating agencies (CRAs) have been inconsistent in assessing the implications of monetary union membership for sovereign risks. It is frequently argued that CRAs have acted procyclically in their rating of sovereign debt in the European Monetary Union (EMU), underestimating sovereign risk in the early years and over-rating the lack of national monetary sovereignty since the onset of the Eurozone debt crisis. Yet, there is little direct evidence for this so far. While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union. Design/methodology/approach – While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union. This paper examines the major CRAs’ methodologies for rating sovereign debt and test their sovereign credit ratings for a monetary union bonus in good times and a malus, akin to the “original sin” problem of emerging market countries, in bad times. Findings – Using a newly compiled dataset of quarterly sovereign bond ratings from 1990 until 2012, the panel regression estimation results find strong evidence that EMU countries received a rating bonus on euro-denominated debt before the European debt crisis and a large penalty after 2010. Practical implications – The crisis has brought to light that EMU countries’ euro-denominated debt may not be considered as local currency debt from a rating perspective after all. Originality/value – In addition to quantifying the local currency bonus and malus, this paper shows the fundamental problem of rating sovereign debt of monetary union members and provide approaches to estimating it over time.

7. Policy-Making under Economic and Monetary Union Crisis, Change, and Continuity

2017 ◽  
Author(s):  
Dermot Hodson
Keyword(s):  
Monetary Union ◽  
Euro Area ◽  
Sovereign Debt ◽  
Policy Making ◽  
De Novo ◽  
Debt Crisis ◽  
Policy Coordination ◽  
Financial Supervision ◽  
Economic And Monetary Union ◽  
High Stakes

This chapter examines the role of the economic and monetary union (EMU) in the European Union’s macroeconomic policy-making. As of 2015, nineteen members of the euro area have exchanged national currencies for the euro and delegated responsibility for monetary policy and financial supervision to the European Central Bank (ECB). EMU is a high-stakes experiment in new modes of EU policy-making insofar as the governance of the euro area relies on alternatives to the traditional Community method, including policy coordination, intensive transgovernmentalism, and delegation to de novo bodies. The chapter first provides an overview of the origins of the EMU before discussing the launch of the single currency and the sovereign debt crisis. It also considers variations on the Community method, taking into account the ECB and the European Stability Mechanism.

23. Economic and Monetary Union

2019 ◽  
pp. 343-357
Author(s):  
Amy Verdun
Keyword(s):  
Exchange Rates ◽  
Monetary Union ◽  
Sovereign Debt ◽  
Global Financial Crisis ◽  
Debt Crisis ◽  
Economic And Monetary Union ◽  
Sovereign Debt Crisis ◽  
To Come ◽  
Set Up ◽  
The Global Financial Crisis

This chapter provides an introduction to economic and monetary union (EMU). It describes the key components of EMU and what happens when countries join. EMU was the result of decades of collaboration and learning, which have been subdivided here into three periods: 1969–91, taking us from the European Council’s first agreement to set up EMU to Maastricht, when the European Council included EMU in the Treaty on European Union (TEU); 1992–2002, from when plans for EMU were being developed to the irrevocable fixing of exchange rates; and 2002 onwards, once EMU had been established, and euro banknotes and coins were circulating in member states. Next, the chapter reviews various theoretical explanations, both economic and political, accounting for why EMU was created and looks at some criticisms of EMU. Finally, the chapter discusses how EMU has fared under the global financial crisis and the sovereign debt crisis. These crises brought to the fore various imperfections in the design of EMU. This section discusses what changes have been made since 2009 to address those flaws and at what we may expect in the years to come.

scholarly journals Discretionary policy in a monetary union with sovereign debt

2011 ◽  
Vol 55 (1) ◽  
pp. 93-117 ◽  
Author(s):  
Campbell Leith ◽  
Simon Wren-Lewis
Keyword(s):  
Monetary Union ◽  
Sovereign Debt

Greece and the Idolatry of Debt

2017 ◽  
Author(s):  
Martin Sandbu
Keyword(s):  
Monetary Union ◽  
Sovereign Debt ◽  
Debt Crisis ◽  
Detailed Examination ◽  
Sovereign Debt Crisis ◽  
Left Wing ◽  
Financial Transfers ◽  
The One ◽  
The Right

This chapter evaluates the case of Greece's sovereign debt crisis. Greece only makes up one-fiftieth of the eurozone economy. The problems it has caused the monetary union, however, are out of all proportion to its size. Greece is where the sovereign debt crisis started; and it is the one eurozone economy whose membership of the euro remains unsettled. That is why a detailed examination of Greece's travails is the right place to start a retelling of Europe's crisis. It reveals just how stubbornly the eurozone has stuck to the goal of trading financial transfers for more centralised power — from the first crisis in early 2010 to the renewed stand-off between Greece and the rest of the eurozone after left-wing radicals won power in Athens in January 2015.

Austerity and European Social Rights: How Can Courts Protect Europe's Lost Generation?

2014 ◽  
Vol 15 (6) ◽  
pp. 1145-1176 ◽  
Author(s):  
Anastasia Poulou
Keyword(s):  
Monetary Union ◽  
Default Risk ◽  
Financial Stability ◽  
Sovereign Debt ◽  
Debt Crisis ◽  
Policy Coordination ◽  
Social Rights ◽  
The European Union ◽  
Lost Generation ◽  
The Eu

The European financial crisis has called many of the assumptions of the constitutional structure of the European Union (EU) into question. The market-based model of the European Monetary Union (EMU) led to an improper assessment of the borrowing capacity of the euro-area Member States and a mispricing of their default risk. Another design flaw of the EMU that has been exposed by the crisis was the weakness of the existing framework for economic policy coordination. The factual interdependence of the participating economies in the monetary union was so strong that the denial of some form of assistance to the debt-distressed countries triggered a domino effect in the Eurozone as a whole. The quest for instruments to address the sovereign debt crisis brought a European constitutional crisis to the forefront: the EU did not possess the appropriate mechanisms to help the states in need and to guarantee financial stability in the EMU.

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