A modern Dionysus' tale: new evidence on the Greek debt crisis and the related costs

In March 2012 Greece pressured its private creditors into agreeing a 53% write-off of its privately-held debt, amounting to €100 billion. Using a game theory approach, we determine whether debt reduction was optimal in reducing the probability of default. We estimate the costs associated with the reduction as well as the potential risks and costs of contagion within the eurozone, especially for large European economies such as Italy and Spain. We show evidence that the Greek sovereign debt crisis could not be handled in the same way as previous experiences. Greece's sovereign debt crisis is unique insofar as the country belongs to a monetary union that has failed to reach economic convergence among its members. This creates significant spillover risk for the other eurozone economies, especially regarding the potential costs of another credit event.