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

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  • Conesa, Juan Carlos

    (Stony Brook University)

  • Kehoe, Timothy J.

    (Federal Reserve Bank of Minneapolis)

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.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 497.

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Length: 12 pages
Date of creation: 05 Feb 2014
Date of revision:
Handle: RePEc:fip:fedmsr:497

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Keywords: Sovereign debt; Bailout; Penalty interest rate; Collateral;

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  1. Timothy Kehoe & Juan Carlos Conesa, 2012. "Gambling for Redemption and Self-Fulfilling Debt Crises," 2012 Meeting Papers 614, Society for Economic Dynamics.
  2. Harold L. Cole & Timothy J. Kehoe, 1998. "Self-Fulfilling Debt Crises," Levine's Working Paper Archive 114, David K. Levine.
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