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The EMU sovereign-debt crisis: Fundamentals, expectations and contagion

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  • Arghyrou, Michael G

    ()
    (Cardiff Business School)

  • Kontonikas, Alexandros

Abstract

We offer a detailed empirical investigation of the European sovereign debt crisis based on the theoretical model by Arghyrou and Tsoukalas (2010). We find evidence of a marked shift in market pricing behaviour from a 'convergence-trade' model before August 2007 to one driven by macro-fundamentals and international risk thereafter. The majority of EMU countries have experienced contagion from Greece. There is no evidence of significant speculation effects originating from CDS markets. Finally, the escalation of the Greek debt crisis since November 2009 is confirmed as the result of an unfavourable shift in country specific market expectations. Our findings highlight the necessity of structural, competitiveness-inducing reforms in periphery EMU countries and institutional reforms at the EMU level enhancing intra-EMU economic monitoring and policy co-ordination.

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Bibliographic Info

Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2010/9.

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Length: 48 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:cdf:wpaper:2010/9

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Keywords: euro-area; crisis; spreads; fundamentals; expectations; contagion; speculation;

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, American Economic Association, vol. 101(5), pages 1676-1706, August.
  2. Gomez-Puig, Marta, 2006. "Size matters for liquidity: Evidence from EMU sovereign yield spreads," Economics Letters, Elsevier, Elsevier, vol. 90(2), pages 156-162, February.
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