Debt Sustainability and Financial Crises: Evidence from the GIIPS

12 Pages Posted: 5 Oct 2011  

Gabriella Deborah Legrenzi

Keele University - Department of Economics

Costas Milas

Keele University; Brunel University London - Economics and Finance

Date Written: September 30, 2011

Abstract

We assess the sustainability of the public finances of Greece, Ireland, Italy, Portugal and Spain (GIIPS), allowing for possible non-linearities in the form of threshold behavior of the fiscal authorities. We provide some evidence of fiscal sustainability when debt gets 'too high' relative to a threshold which is not necessarily fixed but varies with the level of debt relative to its recent history and/or the occurrence of a financial crisis. However, the Greek and Italian debt-to-GDP threshold levels (over which adjustment takes place) exceed 87% and rise further in periods of financial crises. This arguably adds to international investors’ concerns, and as a result, raises the yields demanded for holding Greek and Italian debt. As debt is rolled over at high interest rates, fiscal prospects worsen making default more likely and adding to contagion effects from one Eurozone country to another.

Keywords: debt sustainability, financial crisis

JEL Classification: C200, C500, H300, H500

Suggested Citation

Legrenzi, Gabriella Deborah and Milas, Costas, Debt Sustainability and Financial Crises: Evidence from the GIIPS (September 30, 2011). CESifo Working Paper Series No. 3594. Available at SSRN: https://ssrn.com/abstract=1938926

Gabriella Deborah Legrenzi (Contact Author)

Keele University - Department of Economics ( email )

ST5 5BG Staffordshire, Staffs, ST5 5BG
United Kingdom

Costas Milas

Keele University ( email )

Keele, Staffordshire ST5 5BG
United Kingdom

Brunel University London - Economics and Finance ( email )

Uxbridge
Middlesex UB8 3PH
United Kingdom
0044 1895 816268 (Phone)
0044 1895 203384 (Fax)

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