Sovereign Credit Rating Contagion in the EU

Abstract

Abstract The recent persistent and synchronised deterioration in the euro zone had severe consequences for the euro community, the effects of which have been felt by the global community. This study proved that sovereign rating contagion existed between euro countries during the two recent windows of crises, namely the Lehman and sovereign debt crisis. Compelling evidence from the analysis provided a clear indication of contagion during the two periods of crisis. Results indicated a higher vulnerability to shocks and a higher degree of connection during the windows of crises than during the tranquil periods. Notable was that the European Union (EU) sovereign debt crisis experienced a more pronounced degree of contagion than the Lehman crisis period did. During the sovereign debt crisis window, a dominant theme was the highly integrated connection between the Portugal, Italy, Greece and Spain (PIGS) group of countries.