Skip to content

What If Greece Needs Another Bailout?

Monday, September 14, 2015
greece financial crisis
Thinkstock/Wavebreak Media Ltd

A few weeks ago, a third bailout package was approved for Greece, with this package totaling up to 86 billion euros over three years. But what happens if Greece needs another bailout? A recent Economic Synopses essay explored possible consequences.

Economist Ana Maria Santacreu noted two possible scenarios that could play out for Greece in the next several months:

  • Greece could successfully implement all the reforms attached to the bailout package, generate growth and eventually repay all its debts.
  • Greece could need another bailout, triggering additional talk of the country leaving the eurozone.

Santacreu examined several aspects of the second scenario in her essay.

Eurozone Exposure

Santacreu noted that there is some concern about the effect of Greece leaving the eurozone on the remaining members. Specifically, the concern centers on:

  • Members’ exposure to debt
  • The loss of credibility in financial markets if the eurozone weakens economically

Santacreu noted that the first two bailouts shifted exposure from private creditors to official creditors. Now, the European Central Bank, the International Monetary Fund and the European Commission hold around 75 percent of Greek debt.

Periphery Countries

When the euro was established in 1999, periphery members of the eurozone (such as Greece, Ireland and Spain) were able to borrow at the same low rates as Germany. Many did and began building imbalances. When the fiscal crisis hit Europe a decade later, interest rates went up, making it difficult for these countries to repay their debts. Because these countries are part of the eurozone, they wouldn’t be able to devalue their currency to increase competitiveness and generate growth.

Santacreu noted that, if Greece left the eurozone, another shock to this area could increase the risk premium for other periphery countries. Such a shock could put these countries in a similar situation to Greece, even if their debt currently looks sustainable. Santacreu wrote: “Ireland and Spain, for example, could be in the same position Greece is in now, creating an even worse problem for the EU.”

Currency Devaluation

One argument being made in favor of a “Grexit” is that the ability to devalue currency could lead to an increase in Greek exports and economic growth. However, Santacreu noted that the empirical evidence on the real effect of devaluations is mixed. For example, a devaluation:

  • May not cause a large increase in exports if the economy doesn’t have a well-diversified production structure
  • May increase the costs of imports
  • May increase inflation through imported inflation
  • May cause shortages of goods
  • May cause the value of debt denominated in foreign currencies to increase

She also said that the strength of a country’s financial development can affect the benefits of a devaluation. Exporters tend to depend more on external financing than nonexporters. Thus, a devaluation in a country with poor financial development could end up depressing the economy.

Santacreu concluded: “Therefore, whether a devaluation could drive Greece out of the current crisis remains unclear.”

Additional Resources

Posted In OutputTrade  |  Tagged ana maria santacreugreeceeurozonedevaluationeuro
Commenting Policy: We encourage comments and discussions on our posts, even those that disagree with conclusions, if they are done in a respectful and courteous manner. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted. We reserve the right to remove or not publish inappropriate comments. This includes, but is not limited to, comments that are:
  • Vulgar, obscene, profane or otherwise disrespectful or discourteous
  • For commercial use, including spam
  • Threatening, harassing or constituting personal attacks
  • Violating copyright or otherwise infringing on third-party rights
  • Off-topic or significantly political
The St. Louis Fed will only respond to comments if we are clarifying a point. Comments are limited to 1,500 characters, so please edit your thinking before posting. While you will retain all of your ownership rights in any comment you submit, posting comments means you grant the St. Louis Fed the royalty-free right, in perpetuity, to use, reproduce, distribute, alter and/or display them, and the St. Louis Fed will be free to use any ideas, concepts, artwork, inventions, developments, suggestions or techniques embodied in your comments for any purpose whatsoever, with or without attribution, and without compensation to you. You will also waive all moral rights you may have in any comment you submit.
comments powered by Disqus

The St. Louis Fed uses Disqus software for the comment functionality on this blog. You can read the Disqus privacy policy. Disqus uses cookies and third party cookies. To learn more about these cookies and how to disable them, please see this article.