Munich Personal RePEc Archive

Moral Hazard in the Euro-Zone?

Briceño Avalos, Hernán Ricardo (2012): Moral Hazard in the Euro-Zone? Published in:

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Abstract

The aim of this paper is provide us with empirical evidences and theoretical knowledge about how the compelling current Sovereign Debt Crisis in the periphery Euro-zone countries was triggered according with moral hazard theory, because the implicit and explicit externalization of risk cost for commercial financial institutions and/or banks. Different from traditional working papers that concentrated only on weak macroeconomic fundamentals and contagion effects as the main origins of the previous financial crises. In this way, this research is attempting to solve how moral hazard problem in the Euro-zone periphery countries after the introduction of the Euro currency as a global competitor of the U.S.A. Dollar caused and/or nurtured their fiscal and external unbalances. This after a short period of euphoria and wellbeing, with reduction of the interest rate and easily access to capital to finance unprofitable and risky biased businesses without appropriate banking regulation; ending up in a vicious circle between weak banking system and fiscal imbalances. After assessing thoroughly different related economic and financial statistics from the Euro-zone periphery countries Portugal, Ireland, Italy, Greece and Spain (PIIGS), such as ratio Short Term External Debt/Foreign Exchange Reserve as a moral hazard index, as well as Fiscal and External unbalances accounts, among others, making a comparison with some of the North-core Euro countries evolution, one of the first evidences is that the nowadays Sovereign Debt Crisis has been originated in the awkward circle between weak financial system and implicit guarantees provided by negligent governments without suitable public financial regulation and supervision; while politicians were differing necessary reforms as the fiscal union adoption in the region. All in all, future research about causes of the financial crises should be focused on the moral hazard problems rather that in traditional weak fundamentals; consequently, economy policymakers should come up with the possibility to explicitly and legally avoiding the direct and discretionary interventions of the Central Banks or Governments (Finance Ministers) with the aim to rescue or bailout broken commercial financial institutions under socialization programs of their debts.

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