Repeated Bailouts and Austerity

27 Pages Posted: 20 Dec 2022

See all articles by Friedrich Lucke

Friedrich Lucke

Joint Research Center of the European Commission; Toulouse School of Economics

Date Written: May 31, 2022


This paper studies the incidence of bailouts with the possibility that bailouts may be required repeatedly before the crisis is resolved. I build a model in which two countries engage in a strategic interaction over repeated bailouts and austerity. The strategic interaction ends when the country in crisis has either overcome the crisis or defaulted. Evaluating the properties of the Markov-equilibrium of the model, I show how the rescuing country trades off the costs of bailout with the spillover costs from default. I find that the fundamental conflict of interest over austerity arises over the speed of repayment of the failing country's debt. This finding suggests a new definition for austerity that distinguishes between a solvency and a liquidity dimension of a sovereign debt crisis.

Keywords: Bailouts, Austerity, Sovereign Debt

JEL Classification: E00, E6, F3, G15

Suggested Citation

Lucke, Friedrich, Repeated Bailouts and Austerity (May 31, 2022). Available at SSRN: or

Friedrich Lucke (Contact Author)

Joint Research Center of the European Commission ( email )

Via E. Fermi 2749
Brussels, B-1049

Toulouse School of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042

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