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The Greek Sovereign Debt Crisis: A Conceptual and Empirical Analysis


  • Miguel Ramirez

    () (Department of Economics, Trinity College)

  • Racha Menhem

    () (Department of Economics, Trinity College)


Following the lead of Arghyrou and Kontonikas (2010), this paper presents an endogenous expectations-based model that conceptualizes the ongoing Greek sovereign debt crisis as a currency crisis in disguise. That is, instead of the crisis culminating in a real devaluation of the drachma, it has been diverted to, and erupted in, the bond market where it has significantly raised interest rates, reduced economic growth, and spread it to other weak EMU economies. The empirical results indicate that poor economic fundamentals and international risk did not penalize bond spreads during the pre-crisis period, but are doing so in the crisis period. The estimates suggest that for both the pre-crisis and crisis periods, contagion is generally determined by economic and financial links among countries which, under certain conditions, can spread the crisis in a “fast and furious” manner. The reported estimates also confirm Arghyrou and Tsoukalas’s (2010) theoretical model by showing that an adverse shift in expectations occurred first in November 2009 and then on January 2010, thus significantly increasing bond spreads and slowing economic growth. Finally, the paper extends previous work and presents estimates which indicate that a third adverse shift in expectations took place in May 2010 following the announcement and implementation of the ECB and IMF-sponsored adjustment package. Investors apparently concluded that the draconian austerity measures associated with the latest rescue loan package would actually make economic conditions worse by inducing a self-reinforcing downward spiral in an economy which was already reeling from weak economic fundamentals and high levels of indebtedness.

Suggested Citation

  • Miguel Ramirez & Racha Menhem, 2012. "The Greek Sovereign Debt Crisis: A Conceptual and Empirical Analysis," Working Papers 1203, Trinity College, Department of Economics.
  • Handle: RePEc:tri:wpaper:1203

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    More about this item


    Akaike Information Criterion (AIC); austerity measures; contagion; currency crisis; European Monetary Union (EMU); expectations; fiscal guarantees; Newey-West HAC methodology; spreads.;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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