Financial Repeession

Question 1

Debt repayment via

Answer 1

Economic growth
Fiscal adjustments
Asset sales 
Inflation surprise 
Debt repudiation/default

Question 2

FR introduced…

Answer 2

McKinnan 1973 and Shaw 1973 to investigate the different measures enacted by emerging economies struggling to repay debts

Question 3

Recent research by…

Answer 3

Reinhard and sbrancia 2015 = FR in advanced economies

Nowadays many advanced economies = high levels of debt

Question 4

FR =

Answer 4

1. Directed lending to gov by captive domestic audiences (e.g. Pension funds) - impose or ask financial institutions to buy gov bonds = artificially keeping interest rates lower than free market
2. Explicit/implicit caps on interest rates, regulation of cross border capital movements - caps = less incentives for creditors to save so buy bonds as more profitable
3. Tighter connection between gov and banks - many banks asked to hold gov bonds
4. Some include QE

Question 5

Debt liquidation and FR

Answer 5

Nominal i and high inflation cause -ve interest rates, the stock of outstanding debt = liquidated (decreased)

• but only occurs when interest rates are artificially kept below free market level
• this lower i paid by government yields substantial savings by government = FR TAX

Question 6

Findings

Answer 6

Advanced economies real i = -ve about half the time during 1945-1980
- thanks to FR annual i savings = 1-5% GDP

Real T-bills rates = less/equal to 0 10.5% time 1980-2007

• this share dramatically increased 2007-2015 when rate = below 0 50% time
• -> not surprising given increased levels of indebtedness

Question 7

Advantages / disadvantages of FR

Answer 7

• inflation surprise and FR = 2 alternative measures can be implemented if debt = denominated in domestic currency
• inflation surprise quickly decreased debt but –> capital flights, hyperinflation, and political instability
• FR has advantage of not being very transparent, compatible with growth and to steady decrease debt
• but decreases Openness of financial system and efficiency and implementation is complex

Question 8

Examples

Answer 8

U.K. 2009
FSA requires UK banks and other financial institutions to hold more high quality gov securities (at least £110bn)

US 2013
FED proposes min liquidity requirements for banks and financial institutions –> hold high quality liquid assets i.e. Gov and corporate debt

EU 2013
EQ rules consider some gov securities held by banks at 0 risk