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436 - The EMU sovereign-debt crisis: Fundamentals, expectations and contagion

Michael G. Arghyrou, Cardiff Business School and Alexandros Kontonikas, University of Glasgow Business School

The EMU sovereign-debt crisis: Fundamentals, expectations and contagionpdf(964 kB) Choose translations of the previous link 

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We offer a detailed empirical investigation of the European sovereign debt crisis based on the theoretical model by Arghyrou and Tsoukalas (2010). We find evidence of a marked shift in market pricing behaviour from a ‘convergence-trade’ model before August 2007 to one driven by macro-fundamentals and international risk thereafter. The majority of EMU countries have experienced contagion from Greece. There is no evidence of significant speculation effects originating from CDS markets. Finally, the escalation of the Greek debt crisis since November 2009 is confirmed as the result of an unfavourable shift in country specific market expectations. Our findings highlight the necessity of structural, competitiveness-inducing reforms in periphery EMU countries and institutional reforms at the EMU level enhancing intra-EMU economic monitoring and policy co-ordination.

(European Economy. Economic Papers. 436. February 2011. Brussels. PDF. 47pp. Tab. Graph. Bibliogr. Free.)

KC-AI-11-436-EN-N (online)
ISBN 978-92-79-14922-1 (online)
ISSN 1725-3187
doi:10.2765/47739 (online)

JEL classification: E43, E44, F30, G01, G12

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