The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis

Pierre-Olivier Gourinchas, Philippe Martin and Todd Messer
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Todd Messer: UC Berkeley - University of California [Berkeley] - UC - University of California

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Abstract: Despite a formal ‘no-bailout clause', we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal and Spain, ranging from roughly 0.5% (Ireland) to 43% (Greece) of 2011 output during the recent Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a ‘Southern view' of the crisis (transfers did not help) and a ‘Northern view' (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high debt countries. Hence, the model provides a potential justification for the often decried policy of ‘kicking the can down the road'.

Date: 2020-06
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03813806v1
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Related works:
Working Paper: The Economics of Sovereign Debt, Bailouts, and the Eurozone Crisis (2023)
Working Paper: The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis (2022)
Working Paper: The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis (2020)
Working Paper: The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis (2020)
Working Paper: The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis (2020)
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