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Fundamentally Wrong: Market Pricing Of Sovereigns And The Greek Financial Crisis

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  • Heather D. Gibson
  • Stephen G. Hall
  • George S. Tavlas

    ()

Abstract

We investigate the impact of the economic fundamentals, sovereign credit ratings, political uncertainty, and the ECB’s Securities Markets Program (SMP) on Greek sovereign spreads. Our findings show that sovereign downgrades and political uncertainty appear to have been drivers of the sharp rises in Greek sovereign spreads from 2008-9 onwards, over-and-above the impact of the economic fundamentals. Our findings also show that prior to 2008-2009, the markets failed to incorporate Greece’s deteriorating fundamentals into the price of Greek sovereigns. We demonstrate that, once markets reassessed their pricing of Greek credit risk, the change in the influence of the fundamentals came swiftly and abruptly, exhibiting overshooting characteristics. The SMP reduced spreads while it was in operation.

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Bibliographic Info

Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 13/20.

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Date of creation: Sep 2013
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Handle: RePEc:lec:leecon:13/20

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Keywords: euro area financial crisis; sovereign spreads;

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  1. Schuknecht, Ludger & von Hagen, Jürgen & Wolswijk, Guido, 2010. "Government bond risk premiums in the EU revisited: the impact of the financial crisis," Working Paper Series 1152, European Central Bank.
  2. Beirne, John & Fratzscher, Marcel, 2013. "The pricing of sovereign risk and contagion during the European sovereign debt crisis," Working Paper Series 1625, European Central Bank.
  3. Gibson, Heather D. & Hall, Stephen G. & Tavlas, George S., 2012. "The Greek financial crisis: Growing imbalances and sovereign spreads," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 498-516.
  4. Aizenman, Joshua & Hutchison, Michael & Jinjarak, Yothin, 2013. "What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 37-59.
  5. De Grauwe, Paul & Ji, Yuemei, 2013. "Self-fulfilling crises in the Eurozone: An empirical test," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 15-36.
  6. Mark Mink & Jakob de Haan, 2012. "Contagion during the Greek Sovereign Debt Crisis," DNB Working Papers 335, Netherlands Central Bank, Research Department.
  7. António Afonso & Michael G. Arghyrou & Alexandros Kontonikas, 2012. "The determinants of sovereign bond yield spreads in the EMU," Working Papers Department of Economics 2012/36, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  8. Afonso, António & Arghyrou, Michael G. & Kontonikas, Alexandros, 2012. "The determinants of sovereign bond yield spreads in the EMU," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2012-88, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  9. Dötz, Niko & Fischer, Christoph, 2010. "What can EMU countries' sovereign bond spreads tell us about market perceptions of default probabilities during the recent financial crisis?," Discussion Paper Series 1: Economic Studies 2010,11, Deutsche Bundesbank, Research Centre.
  10. Beetsma, Roel & Giuliodori, Massimo & de Jong, Frank & Widijanto, Daniel, 2013. "Spread the news: The impact of news on the European sovereign bond markets during the crisis," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 83-101.
  11. Kontonikas, Alexandros & Arghyrou, Michael G. & Afonso, António, 2012. "The determinants of sovereign bond yield spreads in the EMU," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2012-88, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  12. Fontana, Alessandro & Scheicher, Martin, 2010. "An analysis of euro area sovereign CDS and their relation with government bonds," Working Paper Series 1271, European Central Bank.
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Cited by:
  1. Marcell Zoltán Végh, 2014. "Has Austerity Succeeded in Ameliorating the Economic Climate? The Cases of Ireland, Cyprus and Greece," Social Sciences, MDPI, Open Access Journal, vol. 3(2), pages 288-307, June.
  2. Brigitte Granville & Dominik Nagly, 2014. "Conflicting incentives for the public to support the EMU," Working Papers 50, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.

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