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The Walking Debt Crisis

Tobias Basse, Robinson Kruse and Christoph Wegener ()
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Tobias Basse: Norddeutsche Landesbank Girozentrale, Postal: Norddeutsche Landesbank Girozentrale, Friedrichswall 10, 30159 Hannover, Germany, and Touro College Berlin, Am Rupenhorn 5, 14055 Berlin, Germany

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This article sheds light on the question whether arising sovereign credit risk in the EMU has been triggered by the US subprime crunch. By adapting recent econometric methodologies suggested in the related field of speculative bubbles, we find clear evidence for fast diverging (and even explosive) behavior of EMU government bond yields of peripheral countries relative to Germany during the financial and the European debt crisis. This might be caused by flight-to-quality effects to German government bonds coincident with the collapse of Lehman Brothers and by a loss of confidence in the fiscal stability of Greece, Ireland, Italy, Portugal and Spain during the European debt crisis. First, we find compelling evidence for bubbles in the Dow Jones Equity Real Estate Investment Trust (REITs) index which serves as a weekly measure of economic activity in the North American real estate sector. Second, in our main analysis, we test whether the collapsing bubble in the housing market triggered the diverging government bond yields during two crisis regimes. Our findings indicate that this was the case in the course of the financial, but not during the EMU sovereign debt crisis. These results suggest that the severe fiscal problems in peripheral countries are homemade rather than imported from the US.

Keywords: Sovereign Debt Crisis; Sovereign Credit Risk; Subprime Crisis; Bubbles; Explosive Behavior; Bubble Migration (search for similar items in EconPapers)
JEL-codes: C22 C52 C53 (search for similar items in EconPapers)
Pages: 41
Date: 2017-01-30
New Economics Papers: this item is included in nep-eec
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