Political Economics of Fiscal Consolidations and External Sovereign Accidents

Carolina Achury, Christos Koulovatianos and John Tsoukalas

Working Papers from Business School - Economics, University of Glasgow

Abstract: As the recent chain of EU sovereign crises has demonstrated, after an unexpected massive rise to the debt GDP ratio, several EU countries manage to proceed with fiscal consolida- tion quickly and effectively, while other countries, notably Greece, proceed slowly, fuelling “Graccident” and “Grexit” scenarios, even after generous rescue packages, involving debt haircuts and monitoring from official bodies. Here we recursively formulate a game among rent-seeking groups and propose that high debt-GDP ratios lead to predictable miscoordina- tion among rent-seeking groups, unsustainable debt dynamics, and open the path to political accidents that foretell “Graccident” scenarios. Our analysis and application helps in under- standing the politico-economic sustainability of sovereign rescues, emphasizing the need for fiscal targets and possible debt haircuts. We provide a calibrated example that quantifies the threshold debt-GDP ratio at 137%, remarkably close to the target set for private sector involvement in the case of Greece.

Keywords: sovereign debt; rent seeking; international lending; tragedy of the commons; EU crisis; Grexit; Graccident (search for similar items in EconPapers)
JEL-codes: D72 E43 E44 F34 F36 G01 H63 (search for similar items in EconPapers)
Date: 2016-05
New Economics Papers: this item is included in nep-eec, nep-mac, nep-pbe and nep-pol
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2016_12

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