Angelos A. Antzoulatos

Policy Responses to the European Debt Crisis - Treating the 'Symptoms' or the 'Disease'?

The conventional narrative for the European debt crisis stresses three factors, namely, bad policies and profligacy in the afflicted countries – mostly southern ones, flaws in the EMU design, and wise policies in the northern frugal countries. This paper argues that the root causes of the crisis lie in the failure of many “safety valves†of market economies, at many levels of the society, both in the crisis countries and in the more “prudent†EMU countries, in an economic environment where unfettered finance can overwhelm even the biggest and best managed economies. Hence, the policy responses based on the conventional narrative are akin to treating the “symptoms†, not the “disease†. As such, they may be setting the foundations for a bigger crisis in the future by strengthening the always-present perverse incentives of many economic players and by proposing complex and unworkable regulatory and supervisory structures. This, together with the unequal sharing of the burden of adjustment – both across and within countries, bodes ill for the long-term prospects of EMU, despite that the aforementioned failures are not intrinsically related to the euro.

Greece in 2010: A Tragedy Without(?) Catharsis

The Greek crisis in 2010 was a tragedy waiting to happen. However, and contrary to the impression created by the stabilization program’s immediate focus on restoring fiscal balance, its roots lie in the erosion of international competitiveness over the past three decades and the attendant de-industrialization of the country. Catharsis, i.e., the creation of the conditions for sustainable long-run growth, requires a coherent, medium-term strategy, bolstered by wide social consensus, to improve competitiveness and redeploy labor and other production factors to the tradeable sector. Nevertheless, owing to the accumulated imbalances, catharsis is fraught with risks. Yet, the proposed alternatives, such as, government debt rescheduling with possible discount and a temporary or permanent exit from EMU, are even worse. They are not likely to succeed, for they do not adequately address the dramatic erosion of competitiveness and have severe potential repercussions.

Do Financial Systems Converge

We apply the new panel convergence methodology developed by Phillips and Sul (2007a) on 13 financial development indices from the World Banks Financial Development and Structure database, to test for financial system convergence across a large set of industrial and developing countries. Our results indicate that there is no convergence for either the financial systems as a whole or their main segments. Far from decreasing, the differences in the financial systems of the sample countries seemingly persist or even increase over time. These differences are more pronounced for the stock market segment and private credit by banks, and less so for the bond market segment and bank deposits. Moreover, the convergent clubs for most indices transcend the distinction industrial vs developing countries, as well as the distinction bank-based vs capital-market-based financial systems.

The enigma of noninterest income convergence

Over the past quarter century, the great wave of financial liberalization, together with advances in information processing technology and finance theory, created severe competitive pressures on both the asset and liability sides of bank balance sheets and, on the positive side, allowed banks to offer more products and services. Responding strategically, banks shifted away from traditional intermediation activities to fee-earning and trading activities. Yet, as we document using the panel convergence methodology developed by Phillips and Sul (2007a), this shift exceeded what one could reasonably expect. Specifically, the share of Noninterest Income (NII) has been converging in the Organization for Economic Co-operation and Development (OECD) countries, providing a strong indication that the aforementioned common competitive pressures dominated the bank-specific and country-specific factors that affect the composition of bank income. Among the policy implications, the systemic risk on a global scale is likely to be greater than that indicated by bank-level and country-level analyses.

Arbitrage opportunities on the road to stabilization and reform

Abstract During the second half of 1993, when far-reaching structural reforms had left Mexican authorities bereft of policy instruments and macroeconomic stabilization had limited their policy options, two private Mexican banks were issuing short-term Euro-dollar debt at a cost substantially below the yield on dollar-linked government securities of similar maturity. A detailed analysis of the authorities’ policy dilemmas, together with a theoretical model that formalizes them, suggests that this negative spread represented arbitrage opportunities for the two banks. It further indicates that similar opportunities may arise again as more countries embark on programs of stabilization and reform.

Expected Government Support of Banks and Market Discipline by Shareholders

The empirical results, from a sample of about 250 banks worldwide, indicate that the expected government support of banks does not weaken market discipline by shareholders. Specifically, shareholders are not willing to pay more for banks with higher expected support. On the contrary, they are willing to pay less for the riskier banks, despite the expected support. The results also indicate that market discipline strengthened after the eruption of the global financial crisis in 2008.

Sustainable Banks - Prudent and Profitable

We explore the observable characteristics of sustainable banks, using a hand-collected dataset comprising of all public US bank holding companies, for the period 1999-2011. Our results indicate that sustainable banks are characterized by superior performance, more prudent behavior and a business model oriented towards financing industry and commerce. Specifically, they exhibit higher ROE and ROA, and have a higher market-to-book ratio which cannot be entirely accounted for by the higher ROE. They also have lower ratios of risk-weighted assets to total assets and finance more of their loans with deposits. Lastly, they have higher ratios of commercial and industrial loans to total loans. Overall, our results are consistent with the view that sustainable banks actively try to improve the risk-return profile of their whole operations, taking advantage of the benefits sustainability confers.

Debt Maturity and Financial Integration

This study applies the panel convergence methodology developed by Philips and Sul (2007) on the debt maturity ratios of a set of firms in developed economies, to explore the effects of credit market integration on debt maturity choices. In contrast to prior studies, our methodology allows for a formal quantification of the integration process. Therefore, we are able to track the evolution of integration over time and identify the conditions under which it is stronger. Firms that are able to integrate with international credit markets face a lower degree of informational asymmetries and have higher collateral value. Furthermore, as firms integrate with international credit markets, they extend their debt maturity. This evidence provides support to the argument that financial integration has a positive impact on firms, by facilitating access to long-term capital. On the contrary, firms not affected by credit market integration, experience a decrease in their debt maturity, as integration continues.

Asymmetric Information and the Medium of Payment in US Takeover Bids

We investigate whether asymmetric information affects the choice of the medium of payment (pure equity vs. pure cash) in U.S. takeover bids during the 1986-2008 period. To this end, we combine proxies for asymmetric information with proxies for the financial characteristics of both the bidding and the target companies in the pre-bid period. Our novel results indicate that acquirers with a high level of asymmetric information, who are either overvalued or have high growth opportunities, are more likely to make a pure equity offer. Acquirers with the opposite characteristics are more likely to make a pure cash offer. These results are largely consistent with Myers and Majluf’s hypothesis (JFE, 1984). Targets’ asymmetric information does not seem to significantly affect the mode of payment. Also, in line with the existing literature, the probability of a pure equity offer is positively related with the level of the targets’ growth opportunities and/or their overvaluation, while the probability of a pure cash offer is positively related with the profitability and liquidity of the acquirers.