Abstract
With the outbreak of the Greek financial crisis in late 2009, spreads on Greek (and other) sovereigns reached unprecedented levels. Using a panel data of euro-area countries, we test whether the markets treated all euro-area countries in an equal manner over the period 1998:m1 to 2012:m6. An F test of the pooling assumptions suggests that Greece, Ireland, and Portugal were not part of the overall pool. In a separate test on the individual coefficients we find that the coefficients on these three countries moved in a similar direction away from the pool, suggesting that markets treated these three countries more acutely than the rest of the pool.
Highlights
The years following the inception of the euro in 1999 have seen some unprece-dented movements of sovereign spreads of euro-area countries (Fig. 1)
This develop-ment is especially striking since an aim of the common currency was to enhance stability among the participating countries following the decade of the 1990s, which saw a number of currency crises
We focus on the results for Greece, which is the country in 4 which the euro-area crisis originated in late 2009
Summary
The years following the inception of the euro in 1999 have seen some unprece-dented movements of sovereign spreads of euro-area countries (Fig. 1) This develop-ment is especially striking since an aim of the common currency was to enhance stability among the participating countries following the decade of the 1990s, which saw a number of currency crises (including in Europe in the early 1990s). If De Grauwe and Ji’s conjecture is wrong, and there was no speculative attack in the sovereign bond markets against any euro-area country, we would expect that the fundamental drivers of sovereign spreads would be the same for each country and have a similar effect.
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