This paper proposes a quantitative theory of the interaction between private and public debt in an open economy. Excessive private debt increases the frequency of financial crises. During such crises the government provides fiscal bailouts financed with risky public debt. This response may cause a sovereign debt crisis, which is characterized by a higher probability of a sovereign default. The model is quantitatively consistent with the evolution of private debt, public debt, and sovereign spreads in Spain from 1999 to 2015, and provides an estimate of the degree of overborrowing, its effect on the spreads, and the optimal macroprudential policy.
The U.S. economy has made a solid recovery as COVID-19 vaccinations were made increasingly available, social distancing began to ease, and businesses gradually reopened. The International Monetary Fund (IMF), among other forecasters, expects the U.S. economy to grow by about 6% in 2021, after contracting about 3.4% in 2020. • Inflation reached a 39-year high of 6.8% in November following a strong rebound from the COVID19-induced recession. • The ‘stronger for longer’ inflation rates prompted the Federal Reserve to accelerate the tapering of its asset purchases and to suggest the likelihood of three rate hikes in 2022. • The 10-year U.S. government bond yield has generally ranged between 1.3% and 1.7% in 2021, increasing from less than 1% in 2020, due in part to fiscal stimulus aiding in economic recovery. • Credit spreads have been muted in 2021 given robust global economic growth, favorable funding conditions, and overall solid corporate performance despite higher costs and supply disruptions. • Global stocks have achieved relatively high returns; in the U.S., the Standard & Poor’s (S&P) 500 posted seven record closing highs in November alone. • The price of oil reached a seven-year high of $85 per barrel in 2021 as demand for oil normalized while the global supply market tightened.
Author(s): : Jennifer Johnson and Michele Wong
Publication Date: 22 Dec 2021
Publication Site: NAIC Capital Markets Bureau Special Reports
It seems that not a week goes by without an announcement of another merger/acquisition transaction in the life insurance industry. With an overlay of persistent capital market volatility and a sharply increased focus on ESG risk factors, life insurance executives will have their plates full of challenges for the balance of 2021. Whether large national carriers or smaller regional players, virtually every life company will experience changes in their operating environment. Our panelists will share their perspectives on how these trends will shape the insurance markets and discuss the implications for credit and risk management.
Author(s): Peter Giacone, KBRA; Celeste Guth, Erinn King, David Marcinek