Debt Sustainability and Financial Crises: Evidence from the GIIPS
AbstractWe assess the sustainability of the public finances of Greece, Ireland, Italy, Portugal and Spain (GIIPS), allowing for possible non-linearities in the form of threshold behaviour of the fiscal authorities. We provide some evidence of fiscal sustainability when debt gets “too high” relative to a threshold which is not necessarily fixed but varies with the level of debt relative to its recent history and/or the occurrence of a financial crisis. However, the Greek and Italian debt-to-GDP threshold levels (over which adjustment takes place) exceed 87% and rise further in periods of financial crises. This arguably adds to international investors’ concerns, and as a result, raises the yields demanded for holding Greek and Italian debt. As debt is rolled over at high interest rates, fiscal prospects worsen making default more likely and adding to contagion effects from one Eurozone country to another.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3594.
Date of creation: 2011
Date of revision:
debt sustainability; financial crisis;
Other versions of this item:
- Gabriella Legrenzi & Costas Milas, 2011. "Debt Sustainability and Financial Crises: Evidence from the GIIPS," Working Paper Series 42_11, The Rimini Centre for Economic Analysis.
- C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
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