Debt, Recovery Rates and the Greek Dilemma
38 Pages Posted: 23 May 2016
Date Written: May 13, 2016
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: Suggested Citation