Country fundamentals as a form of market self-referentiality

Sascha Engel


I argue that the origin of the Eurozone crisis lies neither in unsustainable borrowing nor in arbitrary demands of creditors. Rather, its origin lies in the effects of seemingly arcane technicalities to which sovereign debt issuance is subject. To show this, I propose a set of terms equipped to analyze the effects of these minuscule technicalities. I propose to replace the notion of country fundamentals with that of a fundamental to show that a country is not subject to market assessment when borrowing, but rather subject to market lending pressures forcing it to adopt certain policies even in the absence of outright imposition. Moreover, I propose the notions of flow-stock conversion and liquidity-solvency conversion. The former allows the conversion of sovereign debt as a fiscal instrument to sovereign debt as an asset, thus embedding it into sovereign debt market dynamics. These, in turn, play out as pressure upon the country through the liquidity-solvency conversion turning portfolio restructurings into fiscal solvency shortages. Finally, I propose to analyze countries as intra-market hedges and extra-market hedges to illustrate the extent of market pressures upon countries: to recapitalize banks, countries need to issue more debt, doubling down on the pressure from the liquidity-solvency conversion.


country fundamentals, Eurozone crisis, flow-stock conversion, liquidity-solvency conversion, sovereign debt, sovereignty

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