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Debt, recovery rates and the Greek dilemma

Goodhart, Charles, Peiris, M. U. and Tsomocos, Dimitrios P. (2018) Debt, recovery rates and the Greek dilemma. Journal of Financial Stability. ISSN 1572-3089

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Identification Number: 10.1016/j.jfs.2018.03.007

Abstract

Most discussions of the Greek debt overhang have focussed on the implications for Greece. We show that when additional funds released to the debtor (Greece), via debt restructuring, are used efficiently in pursuit of a practicable business plan, then both debtor and creditor can benefit. We examine a dynamic two country model calibrated to Greek and German economies and support two-steady states, one with endogenous default and one without, depending on creditors’ expectations. In the default steady state, debt forgiveness lowers the volatility of both German and Greek consumption whereas demanding higher recovery rates has the opposite effect. In a second order approximation of the model, conditional welfare analysis shows that a policy of immediate leniency followed by harsher terms as the economy grows is beneficial to both creditors and debtors.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-f...
Additional Information: © 2018 Elsevier B.V.
Divisions: Financial Markets Group
Subjects: H Social Sciences > HG Finance
H Social Sciences > HJ Public Finance
JEL classification: F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation
Sets: Research centres and groups > Financial Markets Group (FMG)
Date Deposited: 25 Apr 2018 14:19
Last Modified: 23 Jan 2019 20:52
Projects: 5-100
Funders: Basic Research Program at the National Research University Higher School of Economics, Russian Academic Excellence Project
URI: http://eprints.lse.ac.uk/id/eprint/87645

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