This distinction between foreign and domestic debt is particularly important in the context of the euro crisis, because eurozone countries cannot devalue to increase exports if this is required to service foreign debt. And the evidence confirms that the euro crisis is not really about sovereign debt, but about foreign debt.

What Euro Crisis?

The IMF s Euro Crisis

The Euro American Debt Dilemma

Stage Three for the Euro Crisis?

How to Resolve the Euro Crisis

The Non Crisis of the Euro

Three New Lessons of the Euro Crisis

Will the Euro Survive the Current Crisis?

VIENNA In 2011, Europe s financial and banking crisis escalated into a sovereign debt crisis. A problem that began in Greece ended up raising doubts about the very viability of the euro and even of the European Union itself.

In Europe, the absence of a political union considered a necessary precondition for sharing debt obligations and, thus, putting the euro on a sound footing is widely held to lie at the root of the continent s crisis. But the US crisis suggests that political union is no panacea for managing sovereign debt.

I. China's growing housing debt crisis

Macroeconomic policy questions external debt crisis

As for the birthplace of the euro crisis, Greece s debt will almost surely have to be restructured. But adequate funding structures for Italy and Spain must be in place before any resolution.

These differences imply that the return to normal market conditions will be slower in the case of the euro crisis. Nevertheless, the crisis should abate somewhat, because the most risk averse institutions have by now sold their holdings of peripheral countries sovereign debt.

Depreciation of the euro would be the best medicine for restoring international price competitiveness to the periphery countries and reviving their export sectors. Of course, they would devalue on their own had they not given up their currencies for the euro ten years before the crisis (and if it were not for their euro denominated debt).

59 223. External debt crisis and development

60 187. External debt crisis and development

61 188. External debt crisis and development

58 203. External debt crisis and development

58 203 External debt crisis and development

58 203 External debt crisis and development

In countries that cannot issue debt in their own currency (traditionally emerging market economies), or that issue debt in their own currency but cannot independently print money (as in the euro zone), unsustainable fiscal deficits often lead to a credit crisis, a sovereign default, or other coercive form of public debt restructuring.

The euro crisis is a complex mixture of banking and sovereign debt problems, as well as divergences in economic performance that have given rise to balance of payments imbalances within the eurozone. The authorities did not understand the complexity of the crisis, let alone see a solution.

This is how the Latin American debt crisis of the 1980s, the Mexican Tequila crisis of 1994, the Asian debt crisis of 1997, and the Russian crisis of 1998 unfolded. It was also how the financial crisis of 2008 2009 transmitted itself to emerging markets.

(c) External debt crisis and development (A 60 139)

CAMBRIDGE This year is likely to mark a make or break ordeal for the euro. The eurozone s survival demands a credible solution to its long running sovereign debt crisis, which in turn requires addressing the two macroeconomic imbalances external and fiscal which are at the heart of that crisis.

The difference with the largest debtor in the euro area, Italy, was 68.2 percentage points. Despite the most severe financial and economic crisis in almost a century, the Finnish national debt actually decreased by 2009, to 39.7 .

As long as this internal divergence persists, the euro crisis cannot be fully resolved, because current account deficits and or slow growth will continue to stalk the southern European countries, perpetuating worries about sovereign debt and commercial banks.

Indeed, only those countries that were running large current account deficits before the crisis were affected by it. The case of Belgium is particularly instructive, because the risk premium on Belgian sovereign debt has remained modest throughout most of the euro crisis, although the country s debt GDP ratio is above the eurozone average, at around 100 , and it went without a government for more than a year.

The interest rates on the euro denominated sovereign debt of the twelve euro zone governments are all very similar. So the market does not seem to care that countries have different potentials to generate exports to fund the financial flows needed for debt repayments, or different current and projected debt to GDP ratios.

2. Why is the housing debt crisis the most serious problem?

It has been two decades since the last global debt crisis.

A couple of years ago, the eurozone was in the latter situation. That is why European Central Bank President Mario Draghi s pledge to do whatever it takes to save the euro immediately brought the eurozone s debt crisis to a halt.

PRINCETON The European Union s sovereign debt crisis constitutes a fundamental threat not only to the euro, but also to democracy and public accountability. At the moment, Europe s woes and dilemmas are confined to relatively small countries like Greece, Ireland, and Hungary.

Until the euro crisis, it was generally believed that problems servicing sovereign debt occurred only in emerging markets and the least developed countries. The US Supreme Court s decision on Argentina adds a new wrinkle, and may well further increase the risk attached to holding sovereign debt and this to the cost of issuing it.

It has become common knowledge in Europe that the ongoing crisis will either destroy the EU or bring about a political union, and that, without a solidarity based solution to existing debt and a partial mutualization of new debt, the euro cannot be saved. Such steps will make far reaching transfers of sovereignty unavoidable.

Managing modern debt crises always involves the extraordinary logic of throwing good money after bad in the hope of masking the underlying unsustainability. The same logic has been applied in the euro crisis, with official money taking the place of private sector exposure.

A public debt crisis in Japan (as the combination of recession, deflation, and high deficits drove up the debt GDP ratio).

There is a close parallel between the euro crisis and the Latin American debt crisis of 1982, when the International Monetary Fund saved the international financial system by lending just enough money to the heavily indebted countries to enable them to avoid default. But the IMF imposed strict austerity on these countries, pushing them into a prolonged depression.

Even if the face value of the Greek debt were not reduced, a maturity extension would still provide massive debt relief on a present value basis to Greece as a euro of debt owed 30 years from now is worth much less today than the same euro owed a year from now. Moreover, a maturity extension resolves rollover risk for the coming decades.

In some countries Argentina, Ecuador and the Russian Federation the debt crisis led to a suspension of payments or defaults on debt service.

The question of debt sustainability analysis is also key to the resolution of the debt crisis of other low and middle income countries.

Most economists failed to foresee the economic dynamics that actually led to the crisis, because they failed to pay enough attention to the rapid increase in US total debt. Instead, they focused exclusively on US foreign debt, ignoring household debt (mortgage and consumer debt), public debt, business debt, and financial debt.

Some countries achieved a real exit from a debt crisis, while others continued to face a lingering debt problem or are considering new debt renegotiations (as in the case of Ecuador).