Lecture | L-PEG Lunch Research Seminar series
International burden-sharing during a financial crisis – We will all go together when we go
- Friday 7 June 2019
- P.N. van Eyckhof 1
During the financial crisis of 2008-10, governments have had varying success in containing the fiscal costs of stabilizing their financial sectors. While most explanations for this focus on purely national factors, this article contends that such an approach is not suited to an internationally integrated financial system like Europe. A comparison of the crisis experiences in Latvia and Ireland shows that both the international monetary system and the way in which these countries were exposed to foreign creditors affected the losses that the taxpayers would have to accept. Latvia benefited both from maintained exposure by foreign banks and an internationally coordinated response to its crisis. The Irish government, by contrast, piled up losses because capital foreign banks reduced their exposure and the ECB prevented the government from bailing in bondholders of bankrupt banks. It is found that in both cases concerns about regional financial stability and the risk of contagion drove decisions by outside actors - the Swedish government and the ECB - that would facilitate or prevent international burden-sharing. The contagion risks from bailing in foreign creditors should therefore be considered more explicitly when analyzing government stabilization schemes in international financial markets.
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