Is It Too Late to Bail Out the Troubled Countries in the Eurozone?

Juan Carlos Conesa and Timothy Kehoe

No 497, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: In January 1995, U.S. President Bill Clinton organized a bailout for Mexico that imposed penalty interest rates and induced the Mexican government to reduce its debt, ending the debt crisis. Can the Troika (European Commission, European Central Bank, and International Monetary Fund) organize similar bailouts for the troubled countries in the Eurozone? Our analysis suggests that debt levels are so high that bailouts with penalty interest rates could induce the Eurozone governments to default rather than reduce their debt. A resumption of economic growth is one of the few ways that the Eurozone crises can end.

Keywords: Sovereign debt; Bailout; Penalty interest rate; Collateral (search for similar items in EconPapers)
JEL-codes: F34 F53 G01 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2014-02-05
New Economics Papers: this item is included in nep-cba, nep-eec and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

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Journal Article: Is It Too Late to Bail Out the Troubled Countries in the Eurozone? (2014)
Working Paper: Is It Too Late to Bail Out the Troubled Countries in the Eurozone? (2014)
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