Creditor moral hazard during the EMU debt crisis

A recent line of research deals with the formulation, the justification and the modelling of a crisis triggered by involved economic agents. Modelling financial crises within an asymmetric information environment is argued to be a difficult task since the measurement of adverse selection and/or moral hazard during a financial/debt crisis is difficult. The present paper focuses on the study of moral hazard within a macroeconomic framework in the context of international lending during a financial/debt crisis. Specifically, we analyse the creditor moral hazard effect due to the international financial support to Greece during the current sovereign debt crisis in the Eurozone. We develop a novel testing procedure to evaluate the hypothesis of creditor moral hazard in a monetary union using data for Ireland and Portugal, two countries which received financial aid packages over the period 2009–2013 with Greece taken as the control country. The main results of our study shed light on the creditor moral hazard issue raised by the provision of multi-source international lending schemes which have been implemented to counteract the European debt crisis.