Greece illustrates how the politics of lending can undermine its effectiveness

Why do bailout packages often fail to restore market confidence? Outlining results from a recent study, Terrence Chapman, Songying Fang and Randall Stone write that creditor countries tend to have a special interest in the crisis country whose loans they are backing. Weaker conditionality applied to countries deemed to have high levels of importance, however, has counter-productive effects, with markets anticipating that easier access to credit may lead to further fiscal instability and recidivist borrowing. They argue that in the Greek case it will be difficult to rebuild the confidence of a market shaken by several failed attempts at stabilisation, and that the country will probably require another round of debt relief.