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Exit from a Monetary Union through Euroization: Discipline without Chaos

Question: Should the EMU exit option be used?
 NO: Bini Smaghi, Sept. 10, 2010
The idea of Greece leaving the Eurozone is absurd
….
 Merkel, March 26, 2012
Greece’s exit from the euro would be a
“catastrophic” political and economic mistake that
would severely weaken Europe’s single currency bloc
…
 Well maybe … Bank of Greece Governor (April, 24, 2012)
… warned the country’s politicians that any
deviation from strict austerity targets after May 6
general elections could lead to the country’s ouster
from the 17-member euro currency bloc.

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(H/T: Alea)

Transmission of distress in a bank credit

The European sovereign debt crisis has impaired many European banks. The distress on the European banks may transmit worldwide, and result in a large-scale knock-on default of financial institutions. This study presents a computer simulation model to analyze the risk of insolvency of banks and defaults in a bank credit network. Simulation experiments reproduce the knock-on default, and quantify the impact which is imposed on the number of bank defaults by heterogeneity of the bank credit network, the equity capital ratio of banks, and the capital surcharge on big banks.

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(Fuente: Four questions, four thoughts, B of America M Lynch, Abril 2012)

Un excelente Research de un economista que habita el Oriente….

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The Link between Eurozone Sovereign  Debt and CDS Prices

Abstract

We perform a theoretical and empirical analysis of the relationship between the price of Eurozone sovereign-linked credit default swaps (CDS) and the same sovereign bond markets during the Eurozone debt crisis of 2009-2011. We first present a simple model which establishes the no-arbitrage relationship between CDS and bond yield spreads. We then test this relationship empirically and explain why the market may deviate from it. Reasons include the different currencies of denomination of market-standard CDS and their reference obligations. We also examine whether CDS spread cause changes in bond spreads, and vice-versa, in a Granger sense. We find evidence for a Granger causal relationship with a one day lag from CDS to bonds for Greece and Spain, the reverse relationship for France and Italy and a feedback relationship for Ireland and Portugal.

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