European Debt Crises

Featured Piece

Matthew Richardson"Europe’s Banks Need a TARP of Their Own" – June 19, 2012

By Matthew Richardson, Charles E. Simon Professor of Applied Economics, Sidney Homer Director, Salomon Center for Research in Financial Institutions and Markets and Professor of Finance, Kermit Schoenholtz, Professor of Management Practice and Director of the Center for Global Economy and Business & Thomas Cooley, Paganelli-Bull Professor of Business and International Trade.

In spite of Sunday’s victory of pro- bailout parties in the Greek election, the European Monetary Union remains in a battle for its survival. What began as a debt predicament is now compounded by a rapidly expanding banking crisis and growing political instability that threaten European integration.

Recent European backing to stem the run on Spanish banks was a welcome step away from the prevailing position that fiscal and banking problems aren’t candidates for coordinated action. Unfortunately, the details of the support for Spanish banks are vague, and were insufficient to calm the financial markets. Instead, the yield on Spanish 10-year government bonds has risen above 7 percent.....Read More

In the Media

Breaking the Bank-Sovereign Nexus, by Viral Acharya,, February 4, 2013.

"Theory and Reality of Europe," by Professor David Backus, Huffington Post, November 29, 2012.

"Europe's Banks Need a TARP of Their Own
," by Professors Kermit Schoenholtz, Matthew Richardson, and Thomas Cooley, Bloomberg, June 18, 2012.

"The Euro Exit," by Professors Matthew Richardson, Thomas Cooley, and Kermit Schoenholtz, The Huffington Post, June 14, 2012.

“Will EU Fail Stress Tests,” Kermit Schoenholtz, Anil K Kashyap, Hyun Song Shin, Bloomberg, March 14, 2012.

“Bankruptcies are not the End,” Yakov Amihud, FT, March 8, 2012.

“Not Even Close,” Thomas Cooley, Kermit Schoenholtz, Matthew Richardson, Huffington Post, December 21, 2011.

“Euro’s fall may doom all,” by Professors Thomas Cooley, Matthew Richardson, Kim Schoenholtz, New York Post, December 7, 2011.

“What Alexander Hamilton Can Teach the Euro Zone,” Thomas Cooley, Matthew Richardson, Kermit Schoenholtz, Politico, December 6, 2011.

“Eurobills, not Eurobonds,” by Professor Thomas Philippon, Vox (, December 2, 2011.

“Europe should avoid eating its seed corn,” by Professor Thomas Cooley, Reuters, October 21, 2011.

“Making Europe Safer,” by Professor Stijn van Niewerberg, Wall Street Journal, September 27, 2011.

“Why European Banks are Stressed Out,” Kermit Schoenholtz, Anil k Kashyap, Hyun Song Shin, Wall Street Journal, March 23, 2011.

“Better Finance for more enterprise growth in Europe,” by Professors Thomas Philippon, Nicolas Veron, Vox ( , February 22, 2008.

“Europe’s saplings need financial fertilizer,” by Professors Thomas Philippon, Nicolas Veron,, February 12, 2008.


“A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk,” Viral Acharya, Itamar Drechsler, Philipp Schnabl, (August 2011).

ABSTRACT (Click Here for Paper)
We show that financial sector bailouts and sovereign credit risk are intimately linked. A bailout benefits the economy by ameliorating the under-investment problem of the financial sector. However, increasing taxation of the non-financial sector to fund the bailout may be inefficient since it weakens its incentive to invest, decreasing growth. Instead, the sovereign may choose to fund the bailout by diluting existing government bondholders, resulting in a deterioration of the sovereign's creditworthiness. This deterioration feeds back to the financial sector, reducing the value of its guarantees and existing bond holdings as well as increasing its sensitivity to future sovereign shocks. We provide empirical evidence for this two-way feedback between financial and sovereign credit risk using data on the credit default swaps (CDS)of the Euro zone countries and their banks for 2007-11. We show that the announcement of financial sector bailouts was associated with an immediate, unprecedented widening of sovereign CDS spreads and narrowing of bank CDS spreads; however, post-bailouts there emerged a significant co-movement between bank CDS and sovereign CDS, even after controlling for banks' equity performance, the latter being consistent with an effect of the quality of sovereign guarantees on bank credit risk.

“The Reform of the Sovereign Debt Restructuring Process: Problems, Proposed Solutions and the Argentine Episode,” Nouriel Roubini, (April 2004).

ABSTRACT (Click Here for Paper)
The paper overviews the recent debate on the how to reform the sovereign debt restructuring process to make it more orderly. It discusses the market failures in such restructurings and the proposed solutions. These include a sovereign bankruptcy regime, the introduction of collective action clauses in debt contracts and a code of conduct. The current emphasis on the contractual approach is appropriate. But clauses will not resolve all the problems in debt restructurings. Legal reform and litigation are not the central issues that delayed the Argentine restructuring. Thus, the reform agenda should be broadened to ensure that debt crises and restructurings become more orderly.