The First Greek Bailout: Varoufakis v Blanchard

The absurdity of the response to the crisis was in requiring all deficit countries to adjust at the same time. This was a huge fiscal shock to the EZ and affected each member state in an unpredictable way. It certainly contributed to the depth of the collapse in Greek GDP.


The previous two blogs include the views of Varoufakis and Blanchard on the first Greek bailout. This is interesting because both argue that now Greece needs debt relief if it is to achieve a sustainable debt path. However, their perspectives on the first Greek bailout are quite different. Varoufakis argues that the first Greek bailout was about bailing out French and German banks and that was all. Blanchard has a different take. He notes that perceived contagion risk was a concern (I can confirm this) and that this deferred restructuring for two years. This benefitted foreign banks holding Greek debt but also Greek banks, which held one-third of this debt. Blanchard ignores the holdings of Greek debt by Greek banks that were subsidiaries of foreign banks and holdings of Greek debt by Cypriot banks.

Blanchard notes that a haircut was eventually imposed on private sector holdings two years later. True…

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