The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis

103 Pages Posted: 22 Jun 2020

See all articles by Pierre-Olivier Gourinchas

Pierre-Olivier Gourinchas

University of California, Berkeley - Department of Economics; University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Philippe Martin

Sciences Po

Todd Messer

University of California, Berkeley

Multiple version iconThere are 2 versions of this paper

Date Written: June 2020

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’.

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Suggested Citation

Gourinchas, Pierre-Olivier and Martin, Philippe and Messer, Todd, The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis (June 2020). NBER Working Paper No. w27403, Available at SSRN: https://ssrn.com/abstract=3632630

Pierre-Olivier Gourinchas (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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University of California, Berkeley - Economic Analysis & Policy Group ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Philippe Martin

Sciences Po ( email )

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Paris Cedex 07, 75337
France

Todd Messer

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

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