Private and Public Debt Markets in Disequilibrium Theory

Abstract

In disequilibrium pricing of financial markets, excesses in either public debt or private debt can trigger a financial crisis, with attendant bank panics and recessions. For example, in the Euro crisis beginning in 2010, financial contagion in the sovereign bond market has spread among five nations: Greece, Ireland, Cyprus, Portugal, and Spain. But the reasons for the contagion was initially different for the countries, due to either disequilibrium pricing in public debt markets or disequilibrium pricing in private debt markets. In previous papers, we introduced a time-independent supply-demand model (three-dimensional model) for disequilibrium pricing in financial markets [1] and a steady-state disequilibrium systems model for the run-up of a financial crisis in a public debt market [2]. In this paper we construct a time-dependent disequilibrium systems model for the run-up of financial crises in a private debt market. We analyze the empirical case of the 2010-12 Euro crisis in Spain (private debt crisis) and then compare this to the empirical case of the 2010-2015 Euro crisis in Greece (public debt crisis).