Assessing the 2010–2018 financial crisis in Greece, Portugal, Ireland, Spain, and Cyprus

Abstract

PurposeThe article develops a model to interpret the 2010–2018 financial crisis in Greece, Portugal, Ireland, Spain and Cyprus, and the loan programs from the IL (International Lender; i.e. the European Union, the European Commission, and the International Monetary Fund).Design/methodology/approachFor each country, an isoelastic utility with constant relative risk aversion is assumed. For the IL a Cobb Douglas utility is assumed with consumption, the GDP (Gross Domestic Product) to debt ratio, and market stability as inputs, accounting for time discounting. This article applies two methods to assess the empirics. The first method considers the IL's strategy as a whole over the 2010–2018 period. The second method assumes that the IL maximizes its utility in one period to determine its optimal loan, accounting for the empirics in that period, and the debt in the previous period.FindingsFor the first method, when the output elasticity in the IL's Cobb Douglas utility is high favoring consumption, the IL prefers offering a higher loan than its actual loan. Otherwise the IL prefers to offer no loan. The output elasticity at which the IL prefers to offer a loan is lowest for Greece, second lowest for Cyprus, third lowest for Portugal, and highest for Ireland and Spain. A high loan to Greece over a larger range of the output elasticity for Greece's consumption is supported by Greece being prioritized through the loan program. For the second method, the IL prefers to offer no loan to Greece which is too burdened with debt. Thus, the first method seems preferable, considering the entire duration of the crisis holistically.Originality/valueThe article offers a novel perspective of how to assess debt crises, enabling the IL to weigh various factors such as consumption, GDP, loan offered, and each country's debt to credit markets.