Working Paper: NBER ID: w27403
Authors: Pierre-Olivier Gourinchas; Philippe Martin; Todd E. Messer
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’.
Keywords: Sovereign Debt; Bailouts; Eurozone Crisis
JEL Codes: F34; F45
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bailout size (H81) | likelihood of bailouts (H81) |
| economic fundamentals (E25) | likelihood of bailouts (H81) |
| economic fundamentals (E25) | size of bailouts (H81) |
| stronger no-bailout commitments (G28) | risk-shifting (H22) |
| stronger no-bailout commitments (G28) | overborrowing (H74) |
| bailouts (H81) | ex-post efficiency (D61) |
| bailouts (H81) | welfare of debtor country (F34) |
| bailouts (H81) | excessive borrowing (F65) |
| no-bailout policy (G28) | risk of immediate insolvency (G33) |