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The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes

  • Michael G. Arghyrou
  • John D. Tsoukalas

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 longterm 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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Article provided by Wiley Blackwell in its journal The World Economy.

Volume (Year): 34 (2011)
Issue (Month): 2 (02)
Pages: 173-191

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Handle: RePEc:bla:worlde:v:34:y:2011:i:2:p:173-191
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  1. 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.
  2. Arghyrou, Michael G. & Gregoriou, Andros & Kontonikas, Alexandros, 2009. "Do real interest rates converge? Evidence from the European union," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(3), pages 447-460, July.
  3. Michael Arghyrou, 2009. "Monetary policy before and after the euro: evidence from Greece," Empirical Economics, Springer, vol. 36(3), pages 621-643, June.
  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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