The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes

31 Pages Posted: 5 Dec 2010

See all articles by Michael Arghyrou

Michael Arghyrou

University of Piraeus

John D. Tsoukalas

University of Glasgow - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 30, 2010

Abstract

We use insights from the literature on currency crises to offer an analytical treatment of the crisis in the market for Greek government bonds. We argue that the crisis itself and its escalating nature are very likely to be the result of: (a) steady deterioration of Greek macroeconomic fundamentals over 2001-2009 to levels inconsistent with long-term EMU participation; and (b) a double shift in markets’ expectations, from a regime of credible commitment to future EMU participation under an implicit EMU/German guarantee of Greek fiscal liabilities, to a regime of non-credible EMU commitment without fiscal guarantees, respectively occurring in November 2009 and February/March 2010. We argue that the risk of contagion to other periphery EMU countries is significant; and that without extensive structural reforms the sustainability of the EMU is in question.

Keywords: currency crises, bonds market, expectations, fiscal guarantees, contagion

JEL Classification: F31, F33, F34, F41, F42, F50

Suggested Citation

Arghyrou, Michael and Tsoukalas, John D., The Greek Debt Crisis: Likely Causes, Mechanics and Outcomes (November 30, 2010). Available at SSRN: https://ssrn.com/abstract=1719032 or http://dx.doi.org/10.2139/ssrn.1719032

Michael Arghyrou (Contact Author)

University of Piraeus ( email )

Karaoli & Dimitriou 80
Piraeus, 18534
Greece
19 (Fax)

HOME PAGE: http://ideas.repec.org/e/par104.html

John D. Tsoukalas

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

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