The credit risk of oil exporting countries such as Venezuela and Russia tends to move with the price of oil. As a country’s oil export revenue improves, so does its ability to pay its debts. Recently, however, Venezuela’s CDS spreads have increased even while the price of oil has been stable. The market’s perception of an increased risk of default coincides with the Venezuelan government’s move to close banks representing 8% of the country’s deposits. On Tuesday December 15th the Venezuelan National Assembly passed a law increasing depositors’ insurance in an effort to prevent a run on the banks. Problems in the financial sector have become the primary driver of Venezuelan sovereign credit risk. Read more »

The size of the market for commercial paper in the U.S. has fallen dramatically since its peak in July 2007. After the disruptions of the Asset-Backed Commercial Paper (ABCP) crisis in August 2007 and the Lehman bankruptcy, the Federal Reserve created a commercial paper funding facility to restore liquidity. However the market for commercial paper has continued to shrink in 2009 straining financial intermediaries who have relied on the market for funding. Read more »

Some assets on the Fed’s balance sheet are short-term credits than could be withdrawn easily if confidence in financial institutions returns, but the Fed has also been buying longer term assets that are harder to unwind. Should the Fed keep buying assets to signal its determination to fight deflation, or does the Fed need to think about how to unwind some of the programs to demonstrate that the expansion of its balance sheet won’t lead to inflation? Read more »

The Fed recently reaffirmed its determination to expand its balance sheet. The crisis has already driven it to take on risky assets such as agency bonds and commercial paper. It has also lent to weak financial institutions, and is expected to participate in the Treasury’s public-private partnership to buy toxic assets. The expansion has averted a crippling credit contraction. But the Fed could lose money by taking on risk. Read more »

A few years ago, countries were seeking to expand their financial sector (move toward the left in the chart) in order to accelerate economic growth. But the crisis has made states more aware of the economic and political risks associated with over-sized banks, as demonstrated by the crisis in Iceland. The crisis has also illustrated the interdependence of the world banking system and the costs of letting foreign banks fail, highlighting the importance of international regulation. The following articles discuss how best to fix finance—through national regulation or international coordination. Read more »