Pure or Wake‐up‐Call Contagion? Another Look at the EMU Sovereign Debt Crisis

Abstract

We test whether the sharp increase in sovereign spreads of euro-area countries with respect to Germany after the explosion of the Greek crisis was due to deteriorating macroeconomic and fiscal fundamentals or to some form of financial contagion. Our analysis includes indicators of domestic and external imbalances which were mostly disregarded by previous studies, and distinguishes between investors' increased attention to the variables which ultimately determine the creditworthiness of a sovereign borrower (wake-up-call contagion) and behaviour not linked to fundamentals (pure contagion). We find evidence of wake-upcall contagion but not of pure contagion. Ã The views expressed in the paper do not necessarily reflect those of the Bank of Italy. We are indebted to

Financial stability in Europe: Banking and sovereign risk

“…In this case, markets revisited the perception of private credit and banking sector issues in the pricing of sovereign risk after the onset of the sovereign crisis in Ireland and later in other countries. In this respect, our results are also in line with Giordano et al (2013) who analyzed the Eurozone sovereign bond markets and found evidence for contagion based on the wake-up call of the Greek crisis.…”

Quantitative Easing and Exuberance in Government Bond Markets: Evidence from the ECB's Expanded Asset Purchase Program

“…Complementary to fiscal, macroeconomic and financial market variables several studies distinguish between the period before and after the sovereign debt crisis to account for a structural change in the relationship between government bond yields and its determinants (Bernoth et al, 2012;Giordano et al, 2013;Beirne and Fratzscher, 2013;De Haan et al, 2014). The sovereign debt crisis started at the end of 2009, when it became clear that fiscal policy in Greece was not sustainable.…”

“…This variable reflects changes in global risk aversion (see e.g. Giordano et al, 2013;Beirne and Fratzscher, 2013;Aizenman et al, 2013;D'Agostino and Ehrmann, 2013;De Haan et al, 2014). A positive sign is expected since in more volatile markets the default risk of countries may increase which results in higher spreads and nominal yields.…”

“…The VIX is also often used in other studies on government bond yields in Euro Area countries (e.g. Giordano et al, 2013). 14 An F-test is performed to conduct a slope homogeneity test with regard to this set of dummy variables.…”

The Significance of Country-specific and Common Risk Factors for CEE Government Bond Spreads Changes

“…(2013) concluded that most of the level of sovereign risk and the rise during the crisis period usually can be explained by a country's own economic fundamentals and its underlying fundamental contagion, while regional contagion explains a much more modest magnitude of sovereign risk. Based on studies by Giordano M. et al (2013), andFavero (2013), the increased unexplainable part of bond spread dynamics since 2010 could be related to the appearance of a new systemic risk, i.e., the risk of a euro break-up, that is, the risk that one or more countries might exit from the EMU.…”