FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 12 July 2015

External And Public Debt Crises

by Minneapolis Fed

At the end of the first decade of the 21st century, the members of two advanced monetary and economic unions, the nations of the Eurozone and the U.S. states, experienced debt crises with spreads on government borrowing rising dramatically: in a short period of time, Californian spreads rose six-fold, Italian rose ten-fold, Illinois fifteen-fold, and Portuguese twenty-five-fold.

Despite the similar behavior of spreads on public debt, these crises were fundamentally different in nature. In Europe, the crisis occurred after a period of significant increases in government indebtedness from levels that were already substantial, whereas in the United States, state government borrowing was limited and remained roughly unchanged. Moreover, whereas the most troubled nations of Europe experienced a sudden stop in private capital flows and private sector borrowers also faced large rises in spreads, there is little evidence that private borrowing in U.S. states was differentially affected by the creditworthiness of state governments. In this sense, we can say that the US states experienced a public debt crisis, whereas the nations of Europe experienced an external debt crisis affecting both public and private borrowers.

Why did Europe experience an external debt crisis and the U.S. states only a public debt crisis? And why did the members of other economic unions, such as the provinces of Canada, not experience a debt crisis at all despite high and rising provincial public debt levels? In this paper, we argue that these different experiences result from the interplay between the ability of governments to interfere in the private external debt contracts of their citizens and the flexibility of state fiscal institutions. The governments of U.S. states, for example, are less fiscally flexible than the members of other economic unions as a result of state and federal limitations on their ability to change taxes and borrow, but are prevented by the U.S. Constitution from interfering in private contracts. Together, these factors result in public debt intolerance and yet also limit the likelihood of an external debt crisis affecting private sector borrowers within the state. Eurozone nations are more fiscally flexible but have a greater ability to interfere with the contracts of their citizens, particularly if one of them exits the eurozone, which together allows for more public borrowing but also raises the likelihood for external debt crises occurring together with public debt crises. Canadian provincial governments are both fiscally flexible and limited in their ability to interfere in private contracts, which both allows for more public borrowing and limits the likelihood that either a public or an external debt crisis will occur.

[click on image below to read more]


Click here for Historical News Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Contributors


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
Comments on Feyerabend’s ‘Against Method’, Part II
Comments on Feyerabend’s ‘Against Method’, Part III
News Blog
Mom Breaks Down In Tears When Son With Autism Meets Service Dog
Rail Week Ending 15 October 2016 Paints A Negative Economic View
What Is The New Normal For U.S. Growth?
Affordable Care Act And Its Effect On Part-Time Employment
The Speed Of Filling Jobs Is Declining
First Working Eggs Made From Stem Cells Points To Fertility Breakthrough
Infographic Of The Day: Mega Machines
Online Platforms Double Down On TV Programming
A History Of Mars Missions
How Tesla Out Innovates Traditional Carmakers
Schiaparelli's Descent To Mars In Real Time
September 2016 Existing Home Sales Still Not Excellent
September 2016 Leading Economic Index Improves Indicating Moderate Growth Ahead.
Investing Blog
Options Early Assignment - Should You Worry?
The 401k Plan Manager 17 October 2016
Opinion Blog
Prop. 51 Versus A State-Owned Bank: How California Can Save $10 Billion On A $9 Billion Loan
Obama's Middle East Policy Has Been A Complete Failure - Or Has It?
Precious Metals Blog
How Will The Election Outcome Impact Precious Metals?
Live Markets
21Oct2016 Pre-Market Commentary: Wall Street Pointing To A Lower Opening Despite So So Corporate Earnings, Markets May Recover Be Late Afternoon
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

Crowdfunding ....



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved