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Eurozone crisis: Looking back to the future

The Eurozone crisis is still lingering. This column uses data from 100 years of sovereign defaults to portray a new take on the crisis. The findings indicate that crises in a financial centre have persistent adverse effects on the periphery. They lead to more economic losses than home-grown idiosyncratic crises. Successful restructuring of such crises would require substantially larger debt write downs than those following idiosyncratic crises.

The Eurozone crisis is still lingering. While in the last couple of months only Greece’s debt woes have been at the centre of public attention, vulnerabilities across countries in the Eurozone are not fading away. Europe is still mired in a long depression, and debt problems are still escalating. While it is true that Ireland, Portugal, and Spain managed to exit their bailouts and Cyprus has recently announced that it intends to do the same, their debt problems are still lingering with debt/GDP ratios at around 100% or more. But the list does not end with the bailout countries. We could add Belgium, France, and Italy to this list of debt-ridden countries. What is the scope of this crisis? 

New research

The research on the roots of the Eurozone Crisis and its possible solutions is large and increasing (e.g. Baldwin and Giavazzi 2015, Gros 2015, Lane 2015).  To gain further perspective on the EZ crisis, our recent work collects evidence from previous crises. But not just any crisis; the European crisis cannot be compared to the crises of the 1990s in Asia, Latin America, Russia, and Turkey. The European crisis erupted in the aftermath of the financial panic in the US in 2008, with international capital markets collapsing and the world economy coming to a standstill. In contrast, the crises of the 1990s erupted in the midst of highly liquid international capital markets with a healthy financial centre and a growing world economy, with vulnerabilities only present in the crisis countries. Crises triggered by a meltdown in the financial centre are different. But what are the characteristics of these crises? And how do they differ from crises erupting from just home-grown problems?

Financial centre panics are rare disasters, so in order to assess the scope of the current crisis we need to look at a longer historical episode. Since financial centre crises come on the heels of international capital flow bonanzas, we should look back to the first episode of financial globalisation in the 19th and early 20th centuries. My recent paper (Kaminsky and Vega-Garcia 2015) examines sovereign defaults from 1820 to 1931 with a focus on Latin America. We identify these two varieties of crises and study their origins as well as their resolutions.   

The origins of systemic and idiosyncratic sovereign debt crises

As shown in Figure 1, during this episode of more than 100 years, there were 67 defaults. Interestingly, 63% of the crises were systemic, with at least one third of the countries defaulting together. These defaults were clustered around a crisis in the financial centre, such as the London panic in 1825, the crash of the Vienna Stock Market in 1873, the near-collapse of Baring Brothers (a major underwriter of Latin America and European government debt) in London in 1890, and, of course, the financial panics in 1929 in London and New York. The remaining 37% of the crises are idiosyncratic – isolated events triggered by just adverse shocks to the domestic economy. 

Figure 1 Sovereign debt crises in Latin America (in percent of countries)

Notes: The bars indicate how many countries default  each year (in percent of all countries).   This figure only identifies the beginning of the default episodes.

Figures 2 to 4 show the different origins of systemic and idiosyncratic sovereign debt crises. These figures show the evolution of global and country-specific fundamentals for an interval of 10 years around the onset of crises. Figure 2 portrays the evolution of international liquidity relative to its average during the 19th and early 20th centuries.  Systemic crises erupt following a massive increase in international liquidity going bust, or more specifically, in the midst of a 14 percentage point decline of international liquidity. In contrast, idiosyncratic crises occur even when the degree of international liquidity is similar to the average liquidity observed during our more than 100 year episode.

Figure 2 International liquidity

Notes: International liquidity is captured with international issuance of periphery countries with high participation in international capital markets, not including Latin American countries.  International issuance is scaled with a measure of the evolution of the world economy, captured with exports of the United Kingdom. This figure shows the average international liquidity around sovereign debt crises relative to its sample average in percentage points. 

Importantly, the panics in the financial centre and the disruption of capital markets fuel sharp economic contractions in the world economy as well as episodes of deflation, making it more difficult for debtor countries to repay their debt. To capture both sluggish real growth and deflation around the beginning of both types of crises, Figure 3 shows the evolution of the growth rate of nominal world economic activity relative to its average during the first episode of financial globalisation in the 19th and early 20th centuries.  Systemic crises occur in the midst of a sharp slowdown of 11 percentage points, while during idiosyncratic crises growth continues at rates similar to the average.    

Figure 3 World growth

Notes: World growth is captured with nominal imports of France, the United Kingdom, and the United States, all measured in a common currency, the British pound.  This figure shows the average world growth around sovereign debt crises relative to its sample average in percentage points. 

The panics in the financial centres also lead to a more dramatic and persistent slowdown of the defaulting countries in the periphery. Figure 4 shows the average growth around sovereign debt crises relative to growth during non-crisis times.   Defaulters’ exports are measured in a common currency, the British pound, to capture both the evolution of real growth and deflation at the onset of these two crises. As shown in Figure 4, growth declines by up to 5 percentage points around the onset of systemic crises, while the decline does not even reach 3 percentage points during defaults triggered by home-grown problems. Furthermore, the contractions are far more persistent around systemic crises.

Figure 4 Defaulters' growth

Notes: This figure uses growth of defaulting countries’ nominal exports (measured in a common currency, the British pound) to capture both the evolution of growth of the real economy and of prices.  the figure shows the average growth of exports around sovereign debt crises relative to their growth rate during non-crisis times in percentage points. 

Crisis resolution: Systemic versus idiosyncratic crises

Our research also examines the resolution of these crises. We calculate the years until the final restructuring of the debt as well as the debt reduction rates. As in the literature on sovereign defaults, we estimate debt reduction rates by comparing the present value of the remaining contractual payments of the old instruments (including missing amortisations or coupon arrears) and the present value of the future payments of the new instruments at the moment of the agreement.[1] We find that systemic crises are not only different from idiosyncratic crises in their origins, but also in their resolutions.

On average, systemic crises tend to last an extra 3 years and, when they end, investors’ losses are about 22 percentage points higher than those following idiosyncratic crises.  

At the core of this difference in resolution are the collapse in international liquidity and the sharp slowdown following the crises in the financial centre. Our estimations of the determinants of long and short restructuring spells indicate that a quick resolution of systemic crises requires not just the end of the bust in international liquidity but also economic recoveries. 

Looking back to the future

While a century apart, the systemic crises of the past offer insights on the scope of the current Eurozone Crisis. Crises in the financial centre have persistent adverse effects in the periphery that are accompanied with multiple and protracted unsuccessful renegotiations of the debt. In the end, a successful restructuring implies substantially larger debt write downs than those following idiosyncratic crises. 


Baldwin, R and F Giavazzi (2015), “Towards and Consensus on the Causes of the EZ Crisis,” VoxEU.org, 7 September.

Cruces, J and C Trebesch (2013), “Sovereign Defaults: The Price of Haircuts,” American Economic Journal: Macroeconomics, 5, 85-117.

Gros, D (2015), “The Eurozone Crisis as a Sudden Stop: It is the Foreign Debt which Matters,” VoxEU.org, 7 September.

Kaminsky, G and P Vega-García (2015), “Systemic and Idiosyncratic Sovereign Debt Crises,” NBER Working Paper No. 20042.

Lane, P (2015), “International Financial Flows and the Eurozone Crisis,” 2015, in The Eurozone Crisis; A Consensus View of the Causes and a Few Possible Solutions, edited by Richard Baldwin and Francesco Giavazzi, CEPR Press.

Sturzenegger, F and J Zettelmeyer (2007), “Creditors’ Losses versus Debt Relief: Results from a Decade of Sovereign Debt Crises,” Journal of the European Economic Association, 5, 343-351.


[1] See, for example, Sturzenegger and Zettelmeyer (2007) and Cruces and Trebesch (2103).

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