The Greek financial crisis: Growing imbalances and sovereign spreads

Abstract

We discuss the origins of the Greek financial crisis as manifested in the growing fiscal and current-account deficits since euro-area entry in 2001. We then provide an investigation of spreads on Greek relative to German long-term government debt. Using monthly data over the period 2000 to 2010, we estimate a cointegrating relationship between spreads and their long-term fundamental determinants, and compare the spreads predicted by this estimated relationship with actual spreads. We find periods of both undershooting and overshooting of spreads compared to what is predicted by the economic fundamentals. JEL Classification: E63; G12

Are all sovereigns equal? A test of the common determination of sovereign spreads in the euro area

“…Recently, Grauwe and Ji ( 2013) have made a theoretical argument to interpret the euro-area sovereign debt crises as a new manifestation of a speculative market attack on a sovereign, but in this case through yield spreads rather than through foreign exchange rates, since currency crises have essentially been precluded by the creation of the euro. 1 In an earlier paper ( Gibson et al 2012), we examined the determinants of spreads between the 10-year benchmark Greek government bond and the German 10-year sovereign. Our data sample was monthly and covered the period from January 2000 through September 2010.…”

“…See Gibson et al ( 2012) for a discussion of the unfolding of the euro-area crisis. The table presents (a) the coefficient β m for each variable and (b) the coefficients and t-statistics on the β * in Eq.…”

Fundamentally Wrong: Market Pricing of Sovereigns and the Greek Financial Crisis

“…A substantial empirical literature examining the contributions of economic fundamentals to spreads both for the euro area as a whole and for individual euro area countries has already emerged (e.g., De Santis (2012); Gibson et al, 2012;De Grauwe and Ji, 2013;Aizenman et al, 2013;Beirne and Fratzscher, 2013;Mink and de Haan, 2013). Typically, that liter-ature posits that, to the extent that sovereign credit risk cannot be explained by the economic fundamentals, factors related to contagion -or, more generally, market psychology -accounted for the unexplained portions of spreads.…”

Interest rate spreads in the eurozone: Fundamentals or sentiments?

“…One way to proceed would be the route taken by Gibson et al (2012) and look at cointegration relationships and VEC models. The great advantage of this approach is the 'natural' benchmark it provides in assessing the spreads.…”