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The Economics of Sovereign Debt, Bailouts, and the Eurozone Crisis
Author:
Pierre-Olivier Gourinchas https://isni.org/isni/0000000404811396 International Monetary Fund

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,
Philippe Martin
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Todd Messer
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Series:
IMF Working Papers
Volume/Issue:
Volume 2023: Issue 177
Language:
English
Publication Date:
25 Aug 2023
DOI:
https://doi.org/10.5089/9798400245503.001
ISBN:
9798400245503
ISSN:
1018-5941
Pages:
78
Keywords:
Euro area; Monetary Union; Sovereign debt; bailouts; Eurozone crisis; bailout size; no-bailout clause; debt country; debtor country; Monetary unions; Loans; Collateral; Debt default; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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 a whopping 43% (Greece) of 2010 output during the 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.’ Mapping the model to the estimated transfers, we find that the main purpose of the outsized Greek bailout was to prevent an exit from the eurozone and possible contagion. Bailouts to avoid sovereign default were comparatively modest.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund