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All in: Market expectations of eurozone integrity in the sovereign debt crisis

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  • Michele Chang
  • Patrick Leblond

Abstract

The behaviour of sovereign bond investors stands at the heart of the euro area debt crisis. By pushing upward the yields on the government debts of member states standing in the eurozone's periphery, investors caused, in a self-fulfilling way, the crisis that ultimately threatened the eurozone's integrity and the euro's survival. So how do we explain the behaviour of market investors before, during and after the eurozone's sovereign debt crisis? Why did investors not discriminate in their pricing of eurozone sovereign bonds before the crisis? Why did they abruptly change their minds in 2010? And why have they gradually felt reassured enough from mid-2011, depending on the country, to ask for significantly lower yields on sovereign bonds? To answer these questions, the paper argues that investors' confidence rests to a large extent on the expectation of the eurozone's solidarity, which is why large-scale multilateral solutions coming from the euro area were more successful in resolving the crisis than unilateral ones coming primarily from the debtor countries. As a result, this paper improves our understanding of the international political economy of financial (currency, bank and debt) crises by looking at the particular case of a monetary union with a single currency.

Suggested Citation

  • Michele Chang & Patrick Leblond, 2015. "All in: Market expectations of eurozone integrity in the sovereign debt crisis," Review of International Political Economy, Taylor & Francis Journals, vol. 22(3), pages 626-655, June.
  • Handle: RePEc:taf:rripxx:v:22:y:2015:i:3:p:626-655
    DOI: 10.1080/09692290.2014.941905
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    File URL: http://hdl.handle.net/10.1080/09692290.2014.941905
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    References listed on IDEAS

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    1. Morris Goldstein & Graciela Kaminsky & Carmen Reinhart, 2017. "Methodology and Empirical Results," World Scientific Book Chapters, in: TRADE CURRENCIES AND FINANCE, chapter 11, pages 397-436, World Scientific Publishing Co. Pte. Ltd..
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2015. "Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(4), pages 5-17, June.
    3. Belke Ansgar, 2013. "Non-Standard Monetary Policy Measures – Magic Wand or Tiger by the Tail?," Review of Economics, De Gruyter, vol. 64(3), pages 341-368, December.
    4. Raffaela Giordano & Marcello Pericoli & Pietro Tommasino, 2013. "Pure or Wake-up-Call Contagion? Another Look at the EMU Sovereign Debt Crisis," International Finance, Wiley Blackwell, vol. 16(2), pages 131-160, June.
    5. Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany.
    6. Gros, Daniel, 2011. "External versus Domestic Debt in the Euro Crisis," CEPS Papers 5677, Centre for European Policy Studies.
    7. Andersson, Magnus & Hansen, Lars Jul & Sebestyén, Szabolcs, 2006. "Which news moves the euro area bond market?," Working Paper Series 631, European Central Bank.
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    Cited by:

    1. Dionysios Tsirigotis, 2019. "The Greek puzzle: A socio-political analysis of the current Greek crisis," International Area Studies Review, Center for International Area Studies, Hankuk University of Foreign Studies, vol. 22(2), pages 148-167, June.

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