Are there any animal spirits behind the scenes of the Euro area sovereign debt crisis?

Mamatzakis, Emmanuel (2013) Are there any animal spirits behind the scenes of the Euro area sovereign debt crisis? Working Paper. Hellenic Observatory or the LSE.

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Abstract

This paper reveals the underlying market’s preferences over the ongoing 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.

Item Type: Reports and working papers (Working Paper)
Schools and Departments: School of Business, Management and Economics > Business and Management
Subjects: H Social Sciences > HG Finance
H Social Sciences > HJ Public Finance > HJ8001 Public debts
Depositing User: Emmanuel Mamatzakis
Date Deposited: 07 Jan 2016 09:26
Last Modified: 07 Jan 2016 09:26
URI: http://sro.sussex.ac.uk/id/eprint/58998

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