International burden-sharing during a financial crisis: We will all go together when we go

During the financial crisis of 2008–2010, governments have had varying success in containing the fiscal costs of stabilizing their financial sectors. This article challenges the existing literature that attributes these differences purely to national factors and contends that the international dimension affects a government’s capacity to share the costs across borders. Specifically, if a country shares a leveraged creditor with other countries, concerns about regional contagion will drive decisions by outside actors to participate in or prevent external burden sharing. A comparison of the role of the Swedish government during the financial crisis in Latvia and the ECB’s influence on Ireland shows that these decisions can both facilitate or prevent international burden-sharing. While Latvia benefited both from maintained exposure by Swedish banks and an internationally coordinated response to its crisis, the Irish government accumulated losses because foreign banks reduced their exposure and the European Central Bank vetoed “bailing in” bondholders of bankrupt banks. Future research on financial stabilization should therefore more explicitly consider possible contagion effects from bailing in foreign creditors.