Is It Too Late to Bail Out the Troubled Countries in the Eurozone?

American Economic Review · 2014 · Volume 104 · Issue 5

Abstract

In January 1995, US 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

International Monetary Arrangements and Institutions, National Debt, Debt Management, Sovereign Debt, Measurement of Economic Growth, Aggregate Productivity, Cross-Country Output Convergence

Enable JavaScript for citation tools and additional paper interactions.