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