The Greek financial crisis: Growing imbalances and sovereign spreads |
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Authors: | Heather D. Gibson Stephen G. Hall George S. Tavlas |
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Affiliation: | 1. Bank of Greece, 21 E Venizelos Ave, Athens 10250, Greece;2. University of Leicester, United Kingdom |
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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 extend a model typically used to explain risk premia to assess the extent to which credit ratings captured these premia. Next, 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 that spreads were significantly below what would be predicted by fundamentals from end-2004 up to the middle of 2005; by contrast, since May 2010, actual spreads have exceeded predicted spreads by some 400 basis points. |
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Keywords: | E63 G12 |
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