Sovereign Debt, Bail-Outs and Contagion in a Monetary Union

Sylvester Eijffinger, Burak Uras and Michal Kobielarz

No 10459, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The European sovereign debt crisis is characterized by the simultaneous surge in borrowing costs in the GIPS countries after 2008. We present a theory, which can account for the behavior of sovereign bond spreads in Southern Europe between 1998 and 2012. Our key theoretical argument is related to the bail-out guarantee provided by a monetary union, which endogenously varies with the number of member countries in sovereign debt trouble. We incorporate this theoretical foundation in an otherwise standard small open economy DSGE model and explain (i) the convergence of interest rates on sovereign bonds following the European monetary integration in late 1990s, and (ii) - following the heightened default risk of Greece - the sudden surge in interest rates in countries with relatively sound economic and financial fundamentals. We calibrate the model to match the behavior of the Portuguese economy over the period of 1998 to 2012.

Keywords: Sovereign debt crisis; Contagion; Bail-out; Interest rate spreads (search for similar items in EconPapers)
JEL-codes: F33 F34 F36 F41 (search for similar items in EconPapers)
Date: 2015-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-mfd, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Sovereign Debt, Bail-Outs and Contagion in a Monetary Union (2015)
Working Paper: Sovereign Debt, Bail-Outs and Contagion in a Monetary Union (2015)
Working Paper: Sovereign Debt, Bail-Outs and Contagion in a Monetary Union (2015)
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