Working Paper: NBER ID: w19909
Authors: Juan Carlos Conesa; Timothy J. Kehoe
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: bailout; eurozone; debt crisis
JEL Codes: F34; F53; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high debt levels among PIIGS countries (F34) | effectiveness of bailouts by the troika (H81) |
| bailout conditions (penalty rates) (G28) | government behavior (debt reduction or default) (H63) |
| bailout conditions (penalty rates) (G28) | government decisions regarding debt repayment and default (H63) |
| high debt levels (F34) | government preference to default rather than comply with bailout conditions (H81) |
| resumption of economic growth (F43) | resolution of the eurozone crisis (H12) |