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We provide an empirical and theoretical analysis of the Greek crisis of 2010. We first benchmark the crisis against all episodes of sudden stops, sovereign debt crises, and lending booms/busts in emerging and advanced economies since 1980. The decline in Greece’s output, especially investment, is deeper and more persistent than in almost any crisis on record over that period. We then propose a stylized macrofinance model to understand what happened. We find that a severe macroeconomiCadjustment was inevitable given the size of the fiscal imbalance; yet, a sizable share of the crisis was also the consequence of the sudden stop that started in late 2009. Our model suggests that the size of the initial macro/financial imbalances can account for muchof the depthof the crisis. When we simulate an emerging-market sudden stop withinitial debt levels (government, private, and external) of an advanced economy, we obtain a Greek crisis. Finally, in recent years, the lack of recovery appears driven by elevated levels of nonperforming loans and strong price rigidities in product markets.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jet.2006.08.001 Byline: Dimitri Vayanos (a), Tan Wang (b) Abstract: We develop a search-based model of asset trading, in which investors of different horizons can invest in two assets with identical payoffs. The asset markets are partially segmented: buyers can search for only one asset, but can decide which one. We show the existence of a 'clientele'' equilibrium where all short-horizon investors search for the same asset. This asset has more buyers and sellers, lower search times, and trades at a higher price relative to its identical-payoff counterpart. The clientele equilibrium dominates the one where all investor types split equally across assets, implying that the concentration of liquidity is socially desirable. Author Affiliation: (a) London School of Economics, CEPR and NBER, UK (b) Sauder School of Business, University of British Columbia, CCFR, Canada Article History: Received 13 April 2005; Revised 7 August 2006

A model is developed wherein the discrepancies between the prices of two identical risky assets is exploited by competitive arbitrageurs. The conditions under which they take the risk are characterized.