Abstract
The European sovereign-debt crisis began in Greece when the government announced in December, 2009, that its debt reached 121% of GDP (or 300 billion euros) and its 2009 budget deficit was 12.7% of GDP, four times the level allowed by the Maastricht Treaty. The Greek crisis soon spread to other Economic and Monetary Union (EMU) countries, notably Ireland, Portugal, Spain and Italy. Using quarterly data for the 2000–2011 period, we implement a panel-vector autoregressive (PVAR) model for 11 EMU countries to examine the extent to which a rise in a country’s bond-yield spread or debt-to-GDP ratio affects another EMU countries’ fiscal and macroeconomic outcomes. To distinguish between interdependence and contagion among EMU countries, we compare results obtained for the pre-crisis period (2000–2007) with the crisis period (2008–2011) and control for global risk aversion.
Highlights
The Euro debt crisis threatens to derail the global recovery following the financial crisis of 2008.This paper examines the transmission of a potential sovereign debt default by contagion in the EuroArea
Following 2008, the same shock to sovereign spreads has a large effect on countries’ debt-to-GDP ratios, if the shock stems from Greece or Spain, suggesting contagion
We estimate the panel-vector autoregressive (PVAR) system, in turn, for shocks originating in Spain, Italy and Germany, as we do for Greece
Summary
The Euro debt crisis threatens to derail the global recovery following the financial crisis of 2008. The same shock originating from the “periphery” causes long-term interest rates in other Euro-area countries to rise slightly, indicating that default risk in the periphery is increasing borrowing costs for most. Using a panel-vector autoregressive (PVAR) model, we assess the extent to which rising debt to GDP ratios and government-bond yield spreads 2 in EMU countries are due to changes in countries’. The sovereign risk-spread relative to the U.S, so we can retain Germany in our sample and examine the response of Euro-area countries to an isolated shock originating in Greece and other peripheral countries using the PVAR approach.
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