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

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  • Michael G. Arghyrou
  • Alexandros Kontonikas

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 Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 436.

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Length: 47 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:euf:ecopap:0436

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  1. Gomez-Puig, Marta, 2006. "Size matters for liquidity: Evidence from EMU sovereign yield spreads," Economics Letters, Elsevier, vol. 90(2), pages 156-162, February.
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Cited by:
  1. Roberto A. De Santis, 2012. "The Euro area sovereign debt crisis: safe haven, credit rating agencies and the spread of the fever from Greece, Ireland and Portugal," Working Paper Series 1419, European Central Bank.
  2. António Afonso & Michael G. Arghyrou & Alexandros Kontonikas, 2012. "The determinants of sovereign bond yield spreads in the EMU," Working Papers 2012/36, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon..
  3. Schmid, Kai Daniel & Schmidt, Michael, 2012. "EMU, the changing role of public debt and the revival of sovereign credit risk perception," University of Tuebingen Working Papers in Economics and Finance 48, University of Tuebingen, Faculty of Economics and Social Sciences.
  4. De Grauwe, Paul & Ji, Yuemei, 2012. "Mispricing of sovereign risk and macroeconomic stability in the Eurozone," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/375097, Katholieke Universiteit Leuven.
  5. Agnieszka Szczypińska, 2012. "Does the halo effect still hold? Implications for the euro-candidates from the analysis of the EA bond market - the crisis perspective," Working Papers 15, Ministry of Finance in Poland.
  6. John Beirne & Jana Gieck, 2012. "Interdependence and contagion in global asset markets," Working Paper Series 1480, European Central Bank.
  7. Georgios P. Kouretas & Prodromos Vlamis, 2010. "The Greek Crisis: Causes and Implications," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 57(4), pages 391-404, December.
  8. António Afonso & Michael G. Arghyrou & George Bagdatoglou & Alexandros Kontonikas, 2013. "On the time-varying relationship between EMU sovereign spreads and their determinants," Working Papers 2013_05, Business School - Economics, University of Glasgow.
  9. Joshua Aizenman & Yothin Jinjarak, 2012. "Income Inequality, Tax Base and Sovereign Spreads," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(4), pages 431-444, December.
  10. Éva Voszka, 2012. "Competition Policy in Europe – Temporary or Long-Lasting Changes?," Public Finance Quarterly, State Audit Office of Hungary, vol. 57(1), pages 71-90.
  11. Luiza Loredana Nastase, 2012. "The Euro Area Crisis," Annals of University of Craiova - Economic Sciences Series, University of Craiova, Faculty of Economics and Business Administration, vol. 1(40), pages 184-187.
  12. Bayoumi, Tamim & Vitek, Francis, 2011. "Spillovers from the Euro Area Sovereign Debt Crisis: A Macroeconometric Model Based Analysis," CEPR Discussion Papers 8497, C.E.P.R. Discussion Papers.
  13. De Grauwe, Paul & Ji, Yuemei, 2012. "Mispricing of sovereign debt and multiple equilibria in the Eurozone," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/359742, Katholieke Universiteit Leuven.
  14. Canofari Paolo & Di Bartolomeo Giovanni & Piersanti Giovanni, 2013. "Theory and practice of contagion in monetary unions. Domino effects in EU Mediterranean countries: The case of Greece, Italy and Spain," wp.comunite 0098, Department of Communication, University of Teramo.
  15. Dimitris A. Georgoutsos & Petros Migiakis, 2012. "Heterogeneity of the determinants of euro-area sovereign bond spreads; what does it tell us about financial stability?," Working Papers 143, Bank of Greece.
  16. De Grauwe, Paul & Ji, Yuemei, 2012. "Mispricing of Sovereign Risk and Multiple Equilibria in the Eurozone," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/343969, Katholieke Universiteit Leuven.
  17. De Grauwe, Paul & Ji, Yuemei, 2012. "Self-Fulfilling Crises in the Eurozone: An Empirical Test," CEPS Papers 7085, Centre for European Policy Studies.
  18. Charlotte Christiansen, 2012. "Integration of European Bond Markets," CREATES Research Papers 2012-33, School of Economics and Management, University of Aarhus.

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