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States, Debt, and Power'Saints' and 'Sinners' in European History and Integration$
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Kenneth Dyson

Print publication date: 2014

Print ISBN-13: 9780198714071

Published to Oxford Scholarship Online: August 2014

DOI: 10.1093/acprof:oso/9780198714071.001.0001

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The Dynamics of External Imbalances and Debt

The Dynamics of External Imbalances and Debt

Chapter:
(p.404) 13 The Dynamics of External Imbalances and Debt
Source:
States, Debt, and Power
Author(s):

Kenneth Dyson

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198714071.003.0014

This chapter examines the difficulties in defining ‘excessive’ external imbalance and external debt. It begins by addressing the issue of ‘original sin’, focusing on Austro-Hungary, Greece, and Spain, and the implications of excessive imbalances and debt for state power. It sets these issues in the contexts of the distinctive characteristics of creditor-debtor state relations. The chapter shows how states are stress-tested using a series of indicators: current accounts, unit labour costs, inflation-rate differentials, domestic savings rates, and net household wealth in the case of external imbalances; gross external debt/GDP ratio, external debt service payments and exports, and foreign-exchange reserves in the case of external debt. The chapter analyses the buffers that states can erect against these types of crisis: export-led growth, size and liquidity of domestic bond market, and foreign-exchange reserves. It concludes by considering external risk management as an imprecise science, stressing the overall importance of private sector and state capacity.

Keywords:   external imbalances, external debt, risk management, original sin, indicators, political will, private sector capacity, state capacity, crisis buffers, foreign exchange

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