The Analytics of the Greek Crisis

We provide an empirical and theoretical analysis of the Greek crisis of 2010. We first benchmark the crisis against all episodes of sudden stops, sovereign debt crises, and lending booms / busts in emerging and advanced economies since 1980. The decline in Greece's output, especially investment, is deeper and more persistent than in almost any crisis on record over that period. We then propose a stylized macrofinance model to understand what happened. We find that a severe macroeconomic adjustment was inevitable given the size of the fiscal imbalance; yet, a sizable share of the crisis was also the consequence of the sudden stop that started in late 2009. Our model suggests that the size of the initial macro / financial imbalances can account for much of the depth of the crisis. When we simulate an emerging-market sudden stop with initial debt levels (government, private, and external) of an advanced economy, we obtain a Greek crisis. Finally, in recent years, the lack of recovery appears driven by elevated levels of nonperforming loans and strong price rigidities in product markets.