Political Economics of Fiscal Consolidations and External Sovereign Accidents

Achury, Carolina; Koulovatianos, Christos; Tsoukalas, John

Reference : Political Economics of Fiscal Consolidations and External Sovereign Accidents


	Document type :	E-prints/Working papers : Already available on another site
	Discipline(s) :	Business & economic sciences : International economics
	To cite this reference:	http://hdl.handle.net/10993/27542

Title :	Political Economics of Fiscal Consolidations and External Sovereign Accidents
Language :	English
Author, co-author :	Achury, Carolina [HSBC > Research]
	Koulovatianos, Christos [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]
Publication date :	2016
Peer reviewed :	No
Keywords :	[en] sovereign debt ; rent seeking ; international lending ; tragedy of the commons ; EU crisis ; Grexit ; Graccident
Abstract :	[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.
Target :	Researchers ; Professionals ; Students ; General public
Permalink :	http://hdl.handle.net/10993/27542
Other URL :	http://EconPapers.repec.org/RePEc:gla:glaewp:2016_12
source URL :	http://www.gla.ac.uk/media/media_460919_en.pdf

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