23 May 2012

‘Grexit’: Who would pay for it?

Cinzia Alcidi / Alessandro Giovannini / Daniel Gros

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The eurozone countries are currently sitting on an aggregate exposure to Greece exceeding €300 billion. If the country were to exit the eurozone, it would certainly not be able to service its debt in the short run when the exchange rate overshoots.
Over the longer run, however, the exchange rate is likely to return to a longer-run equilibrium and growth is likely to slowly resume closing the output gap. Moreover, exports are likely to grow by more than GDP, thus increasing over time the capacity of the country to service foreign debt. Therefore, the authors conclude, whether or not an exit from the eurozone is followed by default on the official debt depends decisively on the willingness (and ability) of Greece’s European partners to wait and finance the bridge between the short and the long run.

Cinzia Alcidi is LUISS Research Fellow at CEPS, Alessandro Giovannini is a Research Assistant at CEPS and Daniel Gros is Director of CEPS.

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