A new book published by the
For this study, Cline developed a new method to assess the probability distribution of future paths for the sovereign debt burden. This method goes beyond the usual enumeration of scenarios by taking account of likely correlations between good and bad scenarios for each of five key macroeconomic variables (GDP growth, primary or noninterest fiscal balance, sovereign risk spread in the interest rate, bank recapitalization costs, and privatization earnings).
Managing the Euro Area Debt Crisis argues that the policy breakthrough that stabilized the region was the
In contrast, at the height of the crisis in 2011-12, sovereign borrowing risk spreads versus German bonds rose to 500-600 basis points in
Cline's innovative approach to assessing the sustainability of government debt does indicate, however, that
See table here: http://www.iie.com/publications/newsreleases/newsrelease.cfm?id=222
Cline warns that it will be crucial to ensure that the bond purchasing program known as OMT remains in place and not be undermined by court decisions that make debt purchased by the ECB senior to the debt held by private investors. Without equal treatment as creditors, private investors would fear larger costs imposed on them in the case of restructuring, undermining confidence. Cline similarly labels as misguided recent proposals for a formal euro area debt restructuring mechanism, because such a mechanism would send a counterproductive signal that could erode the improvement in confidence achieved though the OMT.
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