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The European Debt crisis that erupted in 2009 is still lingering. While in the last couple of months only Greece’s debt woes have been at the center of public attention, vulnerabilities across countries in the Euro zone are not fading away. Europe is still mired in a long depression and debt problems are still escalating. While it is true that Ireland, Portugal, and Spain managed to exit their bailouts, their debt problems are still lingering with debt/GDP ratios at about 100 percent or more. But the list does not end with the bailout countries. We could add Belgium, France, and Italy to this list of debt-ridden countries. What is the scope of this crisis?

The research on the roots of the Euro Crisis and its possible solutions is large and increasing. To gain further perspective on the European crisis, Graciela Kaminsky collects evidence from previous crises. But not just any crisis. The European crisis cannot be compared to the crises of the 1990s in Asia, Latin America, Russia, and Turkey. The European crisis erupted in the aftermath of the financial panic in the United States in 2008, with international capital markets collapsing and the world economy coming to a standstill. In contrast, the crises of the 1990s erupted in the midst of highly liquid international capital markets with a healthy financial center and a growing world economy, with vulnerabilities only present in the crisis countries. Crises triggered by a meltdown in the financial center are different. But what are the characteristics of these crises? And how do they differ from crises erupting from just home-grown problems?

Financial center panics are rare disasters, so in order to assess the scope of the current crisis Kaminsky looks at a longer historical episode. Since financial center crises come on the heels of international capital flow bonanzas, she looks back to the first episode of financial globalization in the 19th and early 20th centuries. Her recent paper, “Systemic and Idiosyncratic Sovereign Debt Crises,” (Kaminsky and Vega-García, 2016), examines sovereign defaults from 1820 to 1931 with a focus on Latin America. This research identifies these two varieties of crises and studies their origins as well as their resolutions.

Interestingly, during this episode, 63% of the crises were systemic, with at least one third of the countries defaulting together. These defaults were clustered around a crisis in the financial center, such as the London panic in 1825, the crash of the Vienna Stock Market in 1873, the near-collapse of Baring Brothers (a major underwriter of Latin America and European government debt) in London in 1890, and, of course, the financial panics in 1929 in London and New York. The remaining 37% of the crises are idiosyncratic: isolated events triggered by just adverse shocks to the domestic economy.

Systemic crises are different. They erupt following a massive increase in international liquidity going bust, or more specifically, in the midst of a 14 percentage-point decline of international liquidity. In contrast, idiosyncratic crises occur even when the degree of international liquidity is similar to the average liquidity observed during the 1820-1931 period.

Importantly, the panics in the financial center and the disruption of capital markets fuel sharp economic contractions in the world economy as well as episodes of deflation, making it more difficult for debtor countries to repay their debt. Systemic crises occur in the midst of a sharp global slowdown of 11 percentage-points, while during idiosyncratic crises, global growth continues at rates similar to the average.

The panics in the financial centers also lead to a more dramatic and persistent slowdown of the defaulting countries in the periphery. Growth declines by up to 5 percentage points around the onset of systemic crises, while the decline does not even reach 3 percentage points during defaults triggered by home-grown problems. Furthermore, the contractions are far more persistent around systemic crises.

This research also examines the resolution of these crises. Interestingly, systemic crises are not only different from idiosyncratic crises in their origins but also in their resolutions. On average, systemic crises tend to last an extra 3 years and, when they end, investors’ losses are about 22 percentage points higher than those following idiosyncratic crises. At the core of this difference in resolution are the collapse in international liquidity and the sharp slowdown following the crises in the financial center. This study’s estimations of the determinants of long and short restructuring spells indicate that a quick resolution of systemic crises requires not just the end of the bust in international liquidity but also economic recoveries.

While a century apart, the systemic crises of the past offer insights on the scope of the current European Debt Crisis. Crises in the financial center have persistent adverse effects in the periphery that are accompanied with multiple and protracted unsuccessful renegotiations of the debt. In the end, a successful restructuring implies substantially larger debt write downs than those following idiosyncratic crises.


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Graciela L. Kaminsky is professor of Economics and International Affairs at George Washington University and Research Associate at the National Bureau of Economic Research. She previously held positions as assistant professor at the University of California, San Diego and staff economist at the Board of Governors of the Federal Reserve System. She has been a Visiting Scholar at numerous government organizations, including the Bank of Japan, the Bank of Spain, the Federal Reserve Bank of New York, the Hong Kong Monetary, and the Monetary Authority of Singapore. She has also been a consultant to international institutions, including the Inter-American Development Bank, the International Monetary Fund, and the World Bank. She holds a Ph.D. in Economics from MIT.

Professor Kaminsky has published widely in leading academic journals, including American Economic Review, Journal of Development Economics, Journal of International Economics, Journal of Monetary Economics, and Journal of Economic Perspectives. Her research has been featured in the financial press, including The Economist, The Financial Times, and Business Week. Professor Kaminsky's research covers a variety of topics in macroeconomics and international finance, including financial globalization, mutual fund's investment strategy, currency and banking crises, contagion, credibility, and inflation stabilization policies.

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