Abstract
The overhang of debt (private and surging public) is perhaps the principal reason why recessions following financial crises are so deep and lasting. Frequently, a wave of international financial and banking crises is followed by a wave of sovereign defaults. This is the case of the Eurozone crisis today. How might a sovereign debt default of, say, Greece affect the Eurozone? The nightmare scenario is a complete unraveling of the euro. The euro can still be saved, but perhaps only with the weaker countries undergoing major restructuring of their sovereign debt.
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Notes
The point that waves of financial crises are often followed by waves of sovereign debt crises is highlighted in Reinhart and Rogoff [2009a], and explored in much greater detail in Reinhart and Rogoff [2011].
See Reinhart and Rogoff [2009a, Chs. 10 and 14] as well as Reinhart and Rogoff [2009b].
My own work on the theory of sovereign debt includes a series of joint papers with Jeremy Bulow. See “References” at the end of this paper.
References
Bulow, Jeremy, and Kenneth Rogoff . 1988a. “The Buyback Boondoggle.” Brookings Papers on Economic Activity (2): 675–698.
Bulow, Jeremy, and Kenneth Rogoff . 1988b. “Multilateral Negotiations for Rescheduling Developing Country Debt: A Bargaining-Theoretic Framework.” International Monetary Fund Staff Papers, 35 (December): 644–657. Reprinted in Frenkel, Jacob A., Michael P. Dooley and Peter Wickham, eds. 1989. Analytical Issues in Debt. International Monetary Fund.
Bulow, Jeremy, and Kenneth Rogoff . 1989a. “Sovereign Debt: Is to Forgive to Forget? American Economic Review, 79 (March): 43–50.
Bulow, Jeremy, and Kenneth Rogoff . 1989b. “A Constant Recontracting Model of Sovereign Debt.” The Journal of Political Economy, 97 (February): 155–178.
Bulow, Jeremy, and Kenneth Rogoff . 1990. “ ‘Introduction’ to Symposium on New Institutions for Developing-Country Debt.” Journal of Economic Perspectives, 4 (Winter): 3–6.
Bulow, Jeremy, and Kenneth Rogoff . 2009. “Cleaning Up Third-World Debt Without Getting Taken to the Cleaners.” Journal of Economic Perspectives, 4 (Winter): 31–42.
Friedman, Milton, and Anna Jacobson Schwartz . 1963. A Monetary History of the United States. Princeton University Press.
Qian, Rong, Carmen M. Reinhart, and Kenneth Rogoff . 2011. “On Graduation from Default, Inflation and Banking Crises: Elusive or Illusion,” in 2010 NBER Macroeconomics Annual, edited by Daron Acemoglu and Michael Woodford University of Chicago Press.
Reinhart, Carmen M., and Kenneth Rogoff . 2009a. This Time Is Different: Eight Centuries of Financial Folly. Princeton University Press.
Reinhart, Carmen M., and Kenneth Rogoff . 2009b. “The Aftermath of Financial Crises.” American Economic Review, 99 (May): 466–472.
Reinhart, Carmen M., and Kenneth Rogoff . 2011. “From Financial Crash to Debt Crisis.” American Economic Review, 101 (August): 1676–706.
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This is a written version of a speech to the National Association for Business Economics (NABE) in Dallas, September 11, 2011, on the occasion of receiving NABE's Adam Smith award.
*Kenneth Rogoff is the Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University. From 2001 to 2003, Rogoff served as Chief Economist and Director of Research at the International Monetary Fund. He is also a former Director of the Center for International Development at Harvard. Rogoff is an elected member of the American Academy of Arts and Sciences, as well as a member of the Council on Foreign Relations and the Trilateral Commission.
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Rogoff, K. Nightmare on Kaiserstrasse. Bus Econ 46, 191–194 (2011). https://doi.org/10.1057/be.2011.24
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DOI: https://doi.org/10.1057/be.2011.24