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The Euro Crisis and Its Aftermath$
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Jean Pisani-Ferry

Print publication date: 2014

Print ISBN-13: 9780199993338

Published to Oxford Scholarship Online: May 2014

DOI: 10.1093/acprof:oso/9780199993338.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 23 April 2021

Let the Banks Pay?

Let the Banks Pay?

(p.85) Chapter 12 Let the Banks Pay?
The Euro Crisis and Its Aftermath

Jean Pisani-Ferry

Oxford University Press

Starting in May 2010, the question of whether financial assistance should be extended to Greece was replaced by a second question: should the country’s private creditors contribute? Facing economic recession, a gargantuan budget deficit, and a seemingly inefficient tax administration, there were doubts about Greece’s ability to repay its debt. Without inflation and the ability to control the exchange rate, stabilisation of the debt-to-GDP ratio and its subsequent reduction required an extremely large and ultimately unrealistic budgetary adjustment. Most observers believed Greece was insolvent but debt restructuring remained a taboo in Europe. It would give rise to long and heated debates between its advocates, including Germany, and its opponents, led by France and the European Central Bank. Europeans eventually broke the taboo in July 2011 with the admission that Greece needed debt relief, though the initial agreement was clearly insufficient to restore debt sustainability. A year after a final agreement was reached on the Greek debt restructuring, and despite the fact Greece was supposed to be a specific and unique case, Cyprus drew attention because of its oversized banking system and the insistence that private creditors be involved. The resolution of the crisis in Cyprus ultimately revealed how far Europe still was from a commonly agreed template for the resolution of banking and sovereign crises.

Keywords:   Greece, financial assistance, budget deficit, International Monetary Fund, debt restructuring, Germany, France, European Central Bank, Cyprus, banking

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