On December 13 and 14, economists from the GSE research community and abroad convened in Barcelona to discuss the latest research and controversies in sovereign risk.
The conference was sponsored by the Centre for Research in International Economics (CREI), one of the GSE’s supporting research institutions, and the Centre for Economics Policy Research (CEPR). It was held at the Ciutadella campus of the GSE, site of both CREI and the UPF, and featured talks by economists from Harvard Business School, International Monetary Fund, Federal Reserve Bank, Central European University, University of Chicago, CREI, UPF, Barcelona GSE, and others.
A panel on "Rethinking the International Financial Architecture"
Economists at the conference presented research on a variety of topics, ranging from restructuring sovereign debt to the role of credit history in sovereign bank lending. Much of the body of research in sovereign risk has been dedicated to analyses of the probabilities and implications of the alteration of foreign-exchange regulations by foreign central banks, thereby significantly reducing or completely annulling the value of foreign-exchange contracts.
Recent hot topics in sovereign risk have included the controversy of vulture funds, formed by western investors capitalizing on the poverty of some countries, and later suing for millions for defaults on debts. HBS Professor Noel Maurer presented his research on this topic in a paper titled “Gunboats and Vultures: Market Reaction to the ‘Enforcement’ of Sovereign Debt”.
The conference began with conference organizer Alberto Martín presenting his paper, “Enforcement Problems and Secondary Markets”, authored with co-organizers Fernando Broner and Jaume Ventura, all of whom are affiliated with the GSE, CREI, CEPR, and UPF.
Attendants of the conference came from both Catalonia and abroad
The research revealed in the paper demonstrated that, despite finding that weak enforcement institutions impair the workings of markets and cause inefficiencies, they also create incentives to develop secondary markets, in which the assets issued in primary markets are re-traded. The trading in secondary markets counteracts the effects of weak enforcement institutions and, in the absence of further frictions, restores efficiency.
Adding a historical perspective to sovereign debt analyses, Barcelona GSE Master Director Hans-Joachim Voth (UPF, ICREA, CREI, CEPR) presented his paper "Lending to the ‘Borrower from Hell’: Debt Sustainability in the Age of Phillip II" (joint with Mauricio Drelichman).
In their work, they argue that lending to Philip II was sustainable because the principal bankers, the Genoese, operated like a single large syndicate, offering funds in overlapping coalitions. They also document the extent to which contracts were contingent on the fiscal health of the Spanish monarchy, linking repayment conditions to significant fiscal news such as the arrival of silver fleets. In this perspective, sixteenth century debt lending created a greater degree of market completeness than that achieved today.
Other presenters included Michael Kremer (Harvard University), Mark Aguiar (University of Rochester), Kenneth Kletzer (UC Santa Cruz), Péter Benczúr (CEU and MNB), Enrique Mendoza (University of Maryland), Veronica Guerrieri (University of Chicago), Jonathan Heathcote (Georgetown University and CEPR), Mark Wright (UCLA), and Olivier Jeanne (IMF and CEPR).
GSE Master Director Joachim Voth gives a talk