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

Author(s): Michael G. Arghyrou, Cardiff Business School and Alexandros Kontonikas, University of Glasgow Business School

The EMU sovereign-debt crisis: Fundamentals, expectations and contagionpdf(988 kB) Choose translations of the previous link 

Summary for non-specialistspdf(104 kB) Choose translations of the previous link 

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 (online)
doi: 10.2765/47739 (online)

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

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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