Syndicate content

debt crisis

The Influence of Greece's Debt Crisis on the Banking Sector

Sergio Schmukler's picture

The crisis in Greece and the Eurozone has escalated as depositors flee banks in fear not only of the consequences of sovereign default but also of Greece abandoning the Euro. Unfortunately, this development makes the crisis much deeper and more difficult to manage. As we (along with Eduardo Levy Yeyati) highlighted in a VoxEU piece in June 2011, the main risk of the Greek debt crisis was its potential spillover to the banking sector.

Viewpoint on a rising dragon

Justin Yifu Lin's picture

As a counterpoint to grim forecasts coming out of Europe, I am hopeful that we can anticipate an Asian century where China will grow dynamically for another 20 years. Yet there are caveats to this optimistic scenario: Success in China will require a process of continual transformation and the wherewithal to tackle what I describe as a triple imbalance at the national level. I expound on this and other points in a BBC viewpoint piece published on November 23.

Triplet Crises: Lessons European Leaders Can Learn From Emerging Markets

Maria Soledad Martinez Peria's picture

Much of the discussion surrounding the current European crisis focused initially on whether a default by Greece was inevitable and how that would impact bond holders. Over time, the attention has shifted to banks and the potential for a generalized run and failure of the financial system, not only in Greece but also in other countries. Unfortunately, the developments in Europe are awfully similar to those in emerging economies in the past. The lessons learned in emerging markets might have helped European policymakers lessen the spillovers from macroeconomic risk to the financial sector, and even at this stage may still be useful for understanding how to manage the on-going crisis.

Many emerging economies used to follow exchange rate pegs, had large degree of liability dollarization, and ran fiscal deficits financed by the banking sector, which led to “triplet crises” involving debt, currency, and banking collapses. The  crises in Argentina and Uruguay in 2000–02 are illustrative. In a recent paper co-authored with Levy Yeyati, we show that macroeconomic risks like exchange rate devaluations or sovereign debt defaults can quickly cause the collapse of banking systems. These macroeconomic events are not random or driven by contagion across banks. Macroeconomic factors that are largely irrelevant in explaining depositor behavior during tranquil times can rapidly become the main driver of market response during crisis episodes, even after controlling for standard bank-specific traits. Furthermore, a crisis in one country (Argentina) can contaminate the banking system of a neighboring country (Uruguay) in a matter of days.