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Current Account Imbalances or Too Much Bank Debt as the Main Driver of Gross Capital Inflows? Spain During the Great Financial Crisis

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  • Eladio Febrero
  • Ignacio Álvarez
  • Jorge Uxó

Abstract

In contrast to the widespread view which posits that large current account deficits and net international debt were at the epicenter of the crisis in the Euro Zone, with diverging competitiveness playing a central role, this article points to the huge volume of bank credit that banks refinanced in international markets.With a focus on the Spanish economy, we ground our view in an analysis linking gross—not net—capital flows, bank credit, and gross external debt, which provides more adequate information about a country’s international financing patterns and its external exposure.The main conclusion of this article is that the principle driver of gross external debt in Spain was bank credit, with accumulated current account deficits accounting for less than 50 percent of gross external debt. Other consequences in keeping with this view are: the measures of economic policy required to sort out current account imbalances—particularly wage devaluation to improve competitiveness—may do more harm than good and they do not prevent the problem of too much bank credit from occurring again, and the residence of debt holders in the Euro Zone crisis is relevant for the understanding of the crisis as the result of a power imbalance

Suggested Citation

  • Eladio Febrero & Ignacio Álvarez & Jorge Uxó, 2019. "Current Account Imbalances or Too Much Bank Debt as the Main Driver of Gross Capital Inflows? Spain During the Great Financial Crisis," Journal of Economic Issues, Taylor & Francis Journals, vol. 53(4), pages 1126-1151, October.
  • Handle: RePEc:mes:jeciss:v:53:y:2019:i:4:p:1126-1151
    DOI: 10.1080/00213624.2019.1675450
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    Cited by:

    1. Ábel, István & Mérő, Katalin, 2024. "A bankszabályozás lehetőségei és korlátai az endogén pénzelmélet keretében. A bankok puha költségvetési korlátja [Possibilities and limits of banking regulation in the endogenous money theory frame," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 604-623.
    2. Karsten Kohler, 2024. "Capital Flows and the Eurozone's North-South Divide," Politics & Society, , vol. 52(2), pages 304-330, June.
    3. Karsten Kohler, 2020. "Gross capital flows and the balance-of-payments: a balance sheet perspective," Working Papers PKWP2019, Post Keynesian Economics Society (PKES).
    4. Eladio Febrero, 2020. "The Changing Growth Pattern in the Spanish Economy Driven by the Eurosystem: from Poor Supervision to Conditionality on the Provision of Central Bank Reserves," Bulletin of Political Economy, Bulletin of Political Economy, vol. 14(2), pages 179-201, December.

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