Are there any Animal Spirits behind the Scenes of the Euro area Sovereign Debt Crisis?

Emmanuel Mamatzakis

GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe from Hellenic Observatory, LSE

Abstract: This paper reveals the underlying market’s preferences over the on going Euro area sovereign debt crisis. It builds on a loss function with reference to the ‘basis’, the difference between the spread over swap and Credit Default Swap (CDS) for sovereign bonds. This loss function is general and flexible as it nests both a lin-lin and quad-quad functional form. The sample covers those Euro area member states most at risk of default namely: Greece, Portugal, Ireland, Spain and Italy. Results show that market’s preferences for some Euro area countries, in particular Greece, have shifted towards pessimism post the Emergency Financing Mechanism (EFM) and troika. If anything, market’s reading of Euro area debt crisis points to the direction of serious misalignments post EFM and troika fuelled by growing pessimism and thus uncertainty. Having derived market’s preferences, we explore the impact of some specific market characteristics and fiscal rules and fiscal institutions on those preferences. Fiscal rules and institutions appear to improve market’s perception over fiscal sustainability, whilst the 3M Euribor, 3M Eurepo, outstanding debt to GDP, and iTraxx main investment grade index also shape market’s preferences.

Keywords: Economic Voting; Greek Crisis; EU; Government Constraints; Accountability (search for similar items in EconPapers)
JEL-codes: E43 E44 G00 G01 G10 (search for similar items in EconPapers)
Date: 2013-07
New Economics Papers: this item is included in nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Working Paper: Are there any animal spirits behind the scenes of the Euro area sovereign debt crisis? (2013)
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