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The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes

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  • Michael G. Arghyrou
  • John D. Tsoukalas

Abstract

We use insights from the literature on currency crises to offer an analytical treatment of the crisis in the market for Greek government bonds. We argue that the crisis itself and its escalating nature are very likely to be the result of: (a) steady deterioration of Greek macroeconomic fundamentals over 2001-2009 to levels inconsistent with long-term EMU participation; and (b) a double shift in markets’ expectations, from a regime of credible commitment to future EMU participation under an implicit EMU/German guarantee of Greek fiscal liabilities, to a regime of non-credible EMU commitment without fiscal guarantees, respectively occurring in November 2009 and February/March 2010. We argue that the risk of contagion to other periphery EMU countries is significant; and that without extensive structural reforms the sustainability of the EMU is in question.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-11/cesifo1_wp3266.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3266.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3266

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Keywords: currency crises; bonds market; expectations; fiscal guarantees; contagion;

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References

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  1. Arghyrou, Michael G & Gregoriou, Andros & Kontonikas, Alexandros, 2007. "Do real interest rates converge? Evidence from the European Union," Cardiff Economics Working Papers E2007/26, Cardiff University, Cardiff Business School, Economics Section.
  2. Michael Arghyrou, 2009. "Monetary policy before and after the euro: evidence from Greece," Empirical Economics, Springer, Springer, vol. 36(3), pages 621-643, June.
  3. Arghyrou, Michael G & Chortareas, Georgios, 2006. "Current Account Imbalances and Real Exchange Rates in the Euro Area," Cardiff Economics Working Papers E2006/23, Cardiff University, Cardiff Business School, Economics Section.
  4. Arghyrou, Michael G & Tsoukalas, John D., 2010. "The Option Of Last Resort: A Two-Currency Emu," Cardiff Economics Working Papers E2010/14, Cardiff University, Cardiff Business School, Economics Section.
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Cited by:
  1. Giorgos Argitis & Stella Michopoulou, 2013. "Studies in Financial Systems No 4 Financialization and the Greek Financial System," FESSUD studies, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project fstudy04, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
  2. António Afonso & Michael G. Arghyrou & Alexandros Kontonikas, 2012. "The determinants of sovereign bond yield spreads in the EMU," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2012/36, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  3. Michael G. Arghyrou & Maria Dolores Gadea, 2008. "The single monetary policy and domestic macro-fundamentals: Evidence from Spain," Documentos de Trabajo, Facultad de Ciencias Económicas y Empresariales, Universidad de Zaragoza dt2008-05, Facultad de Ciencias Económicas y Empresariales, Universidad de Zaragoza.
  4. Fahrholz, Christian & Wójcik, Cezary, 2013. "The Eurozone needs exit rules," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(11), pages 4665-4674.
  5. Paulo Horta, 2013. "Contagion Effects in the European Nyse Euronext Stock Markets in the Context of the 2010 Sovereign Debt Crisis," CEFAGE-UE Working Papers 2013_12, University of Evora, CEFAGE-UE (Portugal).
  6. Eichler, Stefan, 2012. "Financial crisis risk, ECB “non-standard” measures, and the external value of the euro," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 52(3), pages 257-265.
  7. Vítor Caldeirinha & J. Augusto Felício & Andreia Dionísio, 2013. "Effect of the container terminal characteristics on performance," CEFAGE-UE Working Papers 2013_13, University of Evora, CEFAGE-UE (Portugal).
  8. Dmitri Blueschke & Reinhard Neck, 2011. "“Core” and “Periphery” in a Monetary Union: A Macroeconomic Policy Game," International Advances in Economic Research, Springer, Springer, vol. 17(3), pages 334-346, August.
  9. António Afonso, & Michael G. Arghyrou, & George Bagdatoglou, & Alexandros Kontonikas, 2013. "On the time-varying relationship between EMU sovereign spreads and their determinants," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2013/05, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  10. Fredj Jawadi & Ricardo M. Sousa, 2012. "Consumption and Wealth in the US, the UK and the Euro Area:A Nonlinear Investigation," NIPE Working Papers, NIPE - Universidade do Minho 24/2012, NIPE - Universidade do Minho.
  11. Danias, Nikolaos & Kim Swales, John & McGregor, Peter, 2013. "The Greek Electricity Market Reforms: Political and Regulatory Considerations," Energy Policy, Elsevier, Elsevier, vol. 62(C), pages 1040-1047.
  12. Oliveira, Luís & Curto, José Dias & Nunes, João Pedro, 2012. "The determinants of sovereign credit spread changes in the Euro-zone," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 22(2), pages 278-304.
  13. Ata Ozkaya, 2013. "Public Debt Stock Sustainability in Selected OECD Countries," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 13(1), pages 31-49.
  14. Dumitriu, Ramona & Stefanescu, Razvan, 2013. "External debt management in Romania," MPRA Paper 52475, University Library of Munich, Germany, revised 25 Sep 2013.
  15. Gerhard Glomm & Juergen Jung & Chung Tran, 2013. "Fiscal Austerity Measures: Spending Cuts vs. Tax Increases," Working Papers, Towson University, Department of Economics 2013-01, Towson University, Department of Economics, revised Aug 2013.
  16. Sebastian Dellepiane & Niamh Hardiman, 2012. "Fiscal Politics In Time: Pathways to Fiscal Consolidation, 1980-2012," Working Papers, Geary Institute, University College Dublin 201228, Geary Institute, University College Dublin.
  17. Floros, Christos & Kizys, Renatas & Pierdzioch, Christian, 2013. "Financial crises, the decoupling–recoupling hypothesis, and the risk premium on the Greek stock index futures market," International Review of Financial Analysis, Elsevier, Elsevier, vol. 28(C), pages 166-173.
  18. Christophe Blot & Marion Cochard & Bruno Ducoudre & Danielle Schweisguth & Xavier Timbeau & Jérôme Creel, 2014. "Fiscal consolidation, public debt and output dynamics in the euro area : lessons from a simple model with time-varying fiscal multipliers," Sciences Po publications 2014-14, Sciences Po.

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