maltritz & berlemann (eds.) - financial crises, sovereign risk and the role of institutions (2013)

Financial Crises, Sovereign Risk and the Role of Institutions Dominik Maltritz · Michael Berlemann Editors Financial Crises, Sovereign Risk and the Role of Institutions ThiS is a FM Blank Page Dominik Maltritz • Michael Berlemann Editors Financial Crises, Sovereign Risk and the Role of Institutions Editors Dominik Maltritz Faculty of Economics, Law and Social Sciences University of Erfurt Erfurt, Germany Michael Berlemann Faculty of Economics and Social Science Helmut-Schmidt-University Hamburg Hamburg, Germany ISBN 978-3-319-03103-3 ISBN 978-3-319-03104-0 (eBook) DOI 10.1007/978-3-319-03104-0 Springer Cham Heidelberg New York Dordrecht London Library of Congress Control Number: 2013957807 # Springer International Publishing Switzerland 2013 This work is subject to copyright. 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Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com) In honor of our esteemed teacher, colleague and friend Alexander Karmann ThiS is a FM Blank Page Preface According to Wikipedia, a Festschrift “is a book honoring a respected person, especially an academic, and presented during his or her lifetime.” Since we have edited this book to honor Alexander Karmann, our highly respected academic teacher, on the occasion of his 65th birthday this book, entitled “Financial Crises, Sovereign Risk and the Role of Institutions”, is obviously a Festschrift. Alexander Karmann was born on the 19th July 1948 in Nuremberg. He started studying mathematics at University of Erlangen-Nuremberg in 1967. Moreover he studied music at the Academy of Music Nuremberg. After passi ng his exam as a concert pianist he received his diploma in mathematics in 1975. He then switched to Karlsruhe University, where he received his Ph.D. for a dissertation with the title “Competitive equilibria in spatial economies” under the advice of Prof. Dr. Rudolf Henn in 1979. Only 4 years later, he received a venia legendi for economics and statistics at Karlsruhe University after completing his habilitation with a work on Milton Friedman’s Permanent Income Hypothesis. In 1986 he accepted an offer of Hamburg University for a professorship in economics. Since 1994 he has been professor of economics, especially monetary economics, at Technical University of Dresden. Alexander started publishing in international peer-reviewed journals long before the major part of the German community of economists recognized the necessity to take part in the international discussion. As a consequence he has published articles in many international, highly reputed journal s such as the Journal of Mathematical Economics, Regional Science & Urban Economics, the Journal of Institutional & Theoretical Economics, the European Journal of Health Economics, the Review of Development Economics, the Journal of Banking & Finance or the Re view of International Economics, to name only a few. Different from most contemporary young economists he has worked on a wide variety of fields, including regional economics, the shadow economy, monetary policy, banking and financial markets, financial crises and health economics. He also edited a number of highly relevant contributed volumes. Last but not least he published a textbook on mathematical methods which in the meantime is available in the 6th edition. Throughout his professional career Alexander has held numerous positions in economic organizations. He has been member of the Direc torate of the Verein fu ¨ r vii Socialpolitik and is active member of three of its Research Committees (Industrial Economics, Environmental and Resource Economics, Health Economics). More- over he is Research Professor at Halle Institute for Economic Research/IWH. As of today, Alexander is Director of the Centre for Health Economics at Technical University of Dresden and Chairman of the Directorate of the German Association of Faculties of Economic and Social Sciences (WISOFT e.V.). However, he was and still is not only active in external economi c organizations. Alexander also served his Faculty for 5 years as Dean. Finally and for the two of us surely most important , Alexander did a marvelous job in supporting young academics in their research. Numerous Ph.D. candidates successfully finished their projects under his advice and now work in organizations around the globe. Three of his former staff members hold professorships at Universities and it seems realistic that this number further increases in the future. All these merits are more than enough to be honored with a Festschrift. How- ever, the primary reason for us to organize this Festschrift is that both of us feel deeply indebted for the great support he gave to us. When we planned this Festschrift we were well aware of the fact that Festschriften often include a large number of articles on quite heterogeneous topics which stand – if at all – only in loose connection. In the light of the fact that Alexander was active on so many different fields we decided to refrain from producing a mere collection of articles from different fields of economics. Instead, we opted for editing a book on one topic which has been in the centre of Alexander’s interest throughout the last years: Financial Crises and Sovereign Defaults. We are happy that besides a number of Alexander’s schol ars also some colleagues which are experts in the field and which are in close connection with Alexander agreed to contribute to this volume. We would like to use the opportunity to thank all contributors for their fantastic cooperation in this project. Interestingly enough, Wikipedia cites on its internet page on Festschriften also Endel Tulving, a Canadian neuroscientist, when writing: “a Festschrift frequently enough also serves as a convenient place in which those who are invited to contribute find a permanent resting place for their otherwise unpublishable or at least difficult-to-publish papers.” We hope you, Alexander, as well as the other readers of this book will agree that this Festschrift is an exception in this respect. Hamburg and Erfurt, Germany Michael Berlemann July 2013 Dominik Maltritz viii Preface Contents Introduction 1 Michael Berlemann and Dominik Maltritz Gold-Backed Sovereign Bonds: An Effective Alternative to OMTs 7 Ansgar Belke Trust in the European Central Bank Throughout the Worldwide Financial Crisis and the European Debt Crisis 25 Michael Berlemann SIFIs in the Cross Sea: How Are Large German Banks Adju sting to a Rough Economic Environment and a New Regulatory Setting? 49 Thilo Liebig and Sebastian Wider The Endogenous Fragility at Eur opean Periphery 65 Nikolay Nenovsky and Momtchil Karpouzanov The Danger of Tax Havens for Financial Stability 81 Andreas Buehn and Daniel Kraaijeveld van Hemert The Evolution of International Geo-Political Risk 1956–2001 93 Ephraim Clark and Radu Tunaru Financial Crises and Sovereign Default: Dependencies, Timing and Uncertainty in a Stochastic Framework 115 Dominik Maltritz The Risk of Withdrawals from the EMU and the Foreign Exchange Market 141 Stefan Eichler An Economic Approach to Market Risk 157 Christian Hott The Quantity Theory of Money in Year Six After the Subprim e Mortgage Crisis 169 Michael Graff ix [...]... Michael .Berlemann@ hsu-hh.de D Maltritz and M Berlemann (eds.), Financial Crises, Sovereign Risk and the Role of Institutions, DOI 10.1007/97 8-3 -3 1 9-0 310 4-0 _3, # Springer International Publishing Switzerland 2013 25 26 M Berlemann An often helpful way of illustrating the relationship between citizens and governmental institutions is to think of this relationship as an principal-agent problem with the citizens being the. .. D Maltritz (*) Department of International Economics, Faculty of Economics, Law and Social Sciences, ¨ University of Erfurt, Nordhauser Str 63, Erfurt, Germany e-mail: Dominik .Maltritz@ uni-erfurt.de D Maltritz and M Berlemann (eds.), Financial Crises, Sovereign Risk and the Role of Institutions, DOI 10.1007/97 8-3 -3 1 9-0 310 4-0 _1, # Springer International Publishing Switzerland 2013 1 2 M Berlemann and. .. http://www.firstonline.info/a/2012/09/11/alberto-quadrio-curzio-usare-loro-come-collaterale/ 4097075e-c2ac-4bd 4-9 56 7-0 d6877d3a1e0 4 See: Corriere della Sera, 26 June 2012, http://www.corriere.it/economia/12_giugno_26/fondoimmobili-societa-quotate-bot-vegas_31aeeb20-bfa 8-1 1e 1-8 089-c2ba404235e2.shtml Gold-Backed Sovereign Bonds: An Effective Alternative to OMTs 4 13 The Yield Reduction of Gold-Backed Debt: First Estimates Sovereign yield... 45117 Essen, Germany e-mail: ansgar.belke@uni-due.de D Maltritz and M Berlemann (eds.), Financial Crises, Sovereign Risk and the Role of Institutions, DOI 10.1007/97 8-3 -3 1 9-0 310 4-0 _2, # Springer International Publishing Switzerland 2013 7 8 1 A Belke Introduction The European Central Bank (ECB) opened up its third round of secondary bond market purchases on 6 September 2012 Whether they deliver a permanent... in the event of default The yield rate is modeled as: (risk free rate) + (risk premium) with the risk premium as a proxy for the compensation for the credit risk of the asset and calculated as PD*(1-total recovery rate) Financial stress on a sovereign leads to increase in its bond yields as the severity of the crisis translates into an increase in risk free rate, an increase in the probability of default... dependencies and consequences The contributions also highlight and discuss several features of financial institutions and financial markets’ design and in particular the risks they impose to financial stability Many papers have a focus on the European Union and problems and risks of developed countries The book also provides interesting suggestions to the solution of crises and the improvement of financial... longer working Similarities and differences between the two moves are highlighted Many benefits ` of using gold in this manner vis-a-vis the SMP and the OMT are derived from as, for instance, the absence of any transfer of credit risk between high risk/ low risk countries, the fact that losses are borne by specific countries and not the largest shareholder of the ECB (i.e Germany), and, finally, that it would... by specific countries and not by the largest shareholder of ECB and main guarantor of the rescue funds (i.e Germany) This in turn reduces the probability of a downgrading of Germany and its final step-out from the funds and, thus, makes the ESM firewall more sustainable This adds to the benefit of gold-backed bonds that also Italy and Portugal would become even stronger guarantors of the ESM From a general... features of financial institutions and financial markets Many papers have a focus on the European Union and crisis risks of developed countries The book also provides interesting suggestions to the solution of crises and the improvement of financial stability This concerns especially the design of institutional features and financial contracts The introduction provides an overview on the book in general and the. .. crises and sovereign defaults, the reduction of risk and the improvement of institutions We therefore hope that this book will contribute to further developing the discussion on necessary regulatory measures and a reform of institutions, thereby hopefully contributing to Krugman’s mission that the lessons we learn from this crisis will help us avoid, or at least cope better, with the next one.” Gold-Backed . Financial Crises, Sovereign Risk and the Role of Institutions Dominik Maltritz · Michael Berlemann Editors Financial Crises, Sovereign Risk and the Role of Institutions ThiS. Essen, Germany e-mail: ansgar.belke@uni-due.de D. Maltritz and M. Berlemann (eds. ), Financial Crises, Sovereign Risk and the Role of Institutions, DOI 10.1007/97 8-3 -3 1 9-0 310 4-0 _2, # Springer. Dominik .Maltritz@ uni-erfurt.de D. Maltritz and M. Berlemann (eds. ), Financial Crises, Sovereign Risk and the Role of Institutions, DOI 10.1007/97 8-3 -3 1 9-0 310 4-0 _1, # Springer International Publishing Switzerland 2013 1 Mexican