Sovereign Credit Risk in the Euro Zone

Abstract:     
What is the current state of sovereign credit risk across Euro zone? Does the recent fiscal crisis extend to other (non Euro zone) countries? Is Greece the center of the problem? How did the current fiscal crisis in the Euro area start? Who is behind it? Why can it evolve? How can it be addressed? And, is a fiscally-challenged country likely to want to leave the Euro zone? This article addresses these questions, argues that a fiscally-weak country is better off in the Euro zone than outside it, and finds that a feasible policy tool can be a bailout associated with tough fiscal conditionality. It also shows that sovereign credit risk adjustment in the Euro zone can happen, using various measures, but not without "fiscal pain".

Number of Pages in PDF File: 15

Keywords: Euro zone, quantitative easing, sovereign credit risk, sovereign debt, country credit rating, sterilization, contagion, sudden stop, fiscal policy, budget deficit, bailout, sovereign default

JEL Classification: E5, E6, F3, F4, G1, G2, H1, H3, H5, H6

Accepted Paper Series