Reference : Political Economics of Fiscal Consolidations and External Sovereign Accidents
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Business & economic sciences : International economics
Political Economics of Fiscal Consolidations and External Sovereign Accidents
Achury, Carolina [HSBC > Research]
Koulovatianos, Christos mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA) >]
Tsoukalas, John [University of Glasgow > Adam Smith Business School > > Professor]
[en] sovereign debt ; rent seeking ; international lending ; tragedy of the commons ; EU crisis ; Grexit ; Graccident
[en] As the recent chain of EU sovereign crises has demonstrated, after an unexpected massive
rise to the debt GDP ratio, several EU countries manage to proceed with fiscal consolidation quickly and effectively, while other countries, notably Greece, proceed slowly, fueling
Graccident and Grexit scenarios, even after generous rescue packages, involving debt
haircuts and monitoring from official bodies. Here we recursively formulate a game among
rent-seeking groups and propose that high debt-GDP ratios lead to predictable miscoordination among rent-seeking groups, unsustainable debt dynamics, and open the path to political
accidents that foretell Graccident scenarios. Our analysis and application helps in under-
standing the politico-economic sustainability of sovereign rescues, emphasizing the need for
fiscal targets and possible debt haircuts. We provide a calibrated example that quantifies
the threshold debt-GDP ratio at 137%, remarkably close to the target set for private sector
involvement in the case of Greece.
Researchers ; Professionals ; Students ; General public

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