Default risk and fiscal sustainability in PIIGS countries
AbstractEuropean Monetary Union experiences the division into two major blocks according to their ability to respect fiscal criteria and replace their bonds on the market. The so-called PIIGS countries are asked to hardly reduce their deficit and debt in order to prevent speculative attacks and preserve the Currency Union. The aim of the paper is to show that speculative attacks on government debt are not directly linked to default probability, but to liquidity requirements and to the EU fiscal constraints. In times of crisis the path of deficit/GDP ratio goes up and send the signal that governments are loosening their fiscal stance. As far as there are liquidity constraints, markets increase the spreads and force governments to fiscal retrenchments, hardly increasing the cost of adjustment. The result is that in the absence of a bailout shared mechanism financial markets give policy prescriptions and exert a political pressure without having fiscal sovereignty.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 32215.
Date of creation: Jun 2011
Date of revision:
Fiscal policy; sovereign debt crisis; EMU;
Find related papers by JEL classification:
- E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-21 (All new papers)
- NEP-EEC-2011-07-21 (European Economics)
- NEP-MAC-2011-07-21 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Philip Arestis & Malcolm Sawyer, 2003. "Macroeconomic Policies of the Economic Monetary Union: Theoretical Underpinnings and Challenges," Economics Working Paper Archive wp_385, Levy Economics Institute, The.
- Bernoth, Kerstin & Wolff, Guntram B., 2006.
"Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia,"
Discussion Paper Series 1: Economic Studies
2006,19, Deutsche Bundesbank, Research Centre.
- Kerstin Bernoth & Guntram B. Wolff, 2008. "Fool The Markets? Creative Accounting, Fiscal Transparency And Sovereign Risk Premia," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(4), pages 465-487, 09.
- Kerstin Bernoth & Guntram B. Wolff, 2006. "Fool the Markets? Creative Accounting, Fiscal Transparency and Sovereign Risk Premia," CESifo Working Paper Series 1732, CESifo Group Munich.
- Kerstin Bernoth & Guntram Wolff, 2006. "Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia," DNB Working Papers 103, Netherlands Central Bank, Research Department.
- Arestis, Philip & McCauley, Kevin & Sawyer, Malcolm, 2001.
"An Alternative Stability Pact for the European Union,"
Cambridge Journal of Economics,
Oxford University Press, vol. 25(1), pages 113-30, January.
- Philip Arestis & Kevin McCauley & Malcolm Sawyer, 2000. "An Alternative Stability Pact for the European Union," Economics Working Paper Archive wp_296, Levy Economics Institute, The.
- Philip Arestis & Kevin McCauley & Malcolm Sawyer, 2000. "An Alternative Stability Pact for the European Union," Macroeconomics 0004043, EconWPA.
- Dimitri B. Papadimitriou & Greg Hannsgen, 2009. "Recent Rise in Federal Government and Federal Reserve Liabilities--Antidote to a Speculative Hangover," Economics Strategic Analysis Archive sa_apr_09_2, Levy Economics Institute, The.
- Kopf, Christian, 2011. "Restoring financial stability in the euro area," CEPS Papers 4292, Centre for European Policy Studies.
- Olivier Jeanne, 1997.
"Generating Real Persistent Effects of Monetary Shocks: How Much Nominal Rigidity Do We Really Need?,"
NBER Working Papers
6258, National Bureau of Economic Research, Inc.
- Jeanne, Olivier, 1998. "Generating real persistent effects of monetary shocks: How much nominal rigidity do we really need?," European Economic Review, Elsevier, vol. 42(6), pages 1009-1032, June.
- Maurice Obstfeld, 1986.
"Rational and Self-Fulfilling Balance-of-Payments Crises,"
NBER Working Papers
1486, National Bureau of Economic Research, Inc.
- Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
- Barro, Robert J., 1974.
"Are Government Bonds Net Wealth?,"
3451399, Harvard University Department of Economics.
- Stéphanie Guichard & David Haugh & David Turner, 2009. "Quantifying the Effect of Financial Conditions in the Euro Area, Japan, United Kingdom and United States," OECD Economics Department Working Papers 677, OECD Publishing.
- Edda Zoli & Silvia Sgherri, 2009. "Euro Area Sovereign Risk During the Crisis," IMF Working Papers 09/222, International Monetary Fund.
- Louis-Philippe Rochon & Sergio Rossi, 2007. "Central Banking and Post-Keynesian Economics," Review of Political Economy, Taylor and Francis Journals, vol. 19(4), pages 539-554.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.