Sovereign Debt Spreads: Dynamic Determinants - A European Crisis Approach

Abstract

The last stage of the current economic crisis is mainly focused in Europe and, especially, in Portugal, Ireland, Greece and Spain. The severity of their public sector crisis could be a serious problem for the future of the Euro and the European project. As a consequence of it, sovereign bond spreads heterogeneity in the Euroarea are higher than ever. In this work, we identify different determinants of sovereign bond spreads before and after Lehman Brothers' collapse. Finding the determinants of the spreads is relevant for the design of optimal economic policies. We propose a policy agenda based on our obtained results. Finally, following the same approach, we analyze policy-makers response to the crisis, as well as other proposals that are being debated.

Keywords: Sovereign Debt, Euro, Crisis, Determinants, PIGS

JEL Classification: E6, F34