Debt, Recovery Rates and the Greek Dilemma

38 Pages Posted: 23 May 2016  

Charles Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group

Udara Peiris

National Research University Higher School of Economics - International College of Economics and Finance

Dimitrios P. Tsomocos

University of Oxford - Said Business School and St. Edmund Hall

Date Written: May 13, 2016

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.

Keywords: Debt, Default, Renegotiation, Business Cycles, Open Economy

JEL Classification: F34, G15, G18

Suggested Citation

Goodhart, Charles and Peiris, Udara and Tsomocos, Dimitrios P., Debt, Recovery Rates and the Greek Dilemma (May 13, 2016). Saïd Business School WP 2016-15. Available at SSRN: https://ssrn.com/abstract=2783353 or http://dx.doi.org/10.2139/ssrn.2783353

Charles A.E. Goodhart (Contact Author)

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
0207 955 7555 (Phone)
0207 242 1006 (Fax)

Udara Peiris

National Research University Higher School of Economics - International College of Economics and Finance ( email )

Pokrovski Bulvar 11, Korpus Zh, Office 715
Moscow, 109028
Russia

Dimitrios P. Tsomocos

University of Oxford - Said Business School and St. Edmund Hall ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 932 (Phone)
+44 1865 288 805 (Fax)

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