Download this Paper Open PDF in Browser

Sovereign Default Risk in the Euro-Periphery and the Euro-Candidate Countries

28 Pages Posted: 13 Sep 2012  

Hubert Gabrisch

Wiesbaden Institute for Law and Economics

Lucjan T. Orlowski

Sacred Heart University - John F. Welch College of Business

Toralf Pusch

affiliation not provided to SSRN

Date Written: September 13, 2012

Abstract

This study examines the key drivers of sovereign default risk in five euro area periphery countries and three euro-candidates that are currently pursuing independent monetary policies. We argue that the recent proliferation of sovereign risk premiums stems from both domestic and international sources. We focus on contagion effects of external financial crisis on sovereign risk premiums in these countries, arguing that the countries with weak fundamentals and fragile financial institutions are particularly vulnerable to such effects. The domestic fiscal vulnerabilities include: economic recession, less efficient government spending and a rising public debt. External ‘push’ factors entail increasing liquidity- and counter-party risks in international banking, as well as risk-hedging appetites of international investors embedded in local currency depreciation against the US Dollar. We develop a model capturing the internal and external determinants of sovereign risk premiums and test for the examined country groups. The results lead us to caution against premature fiscal consolidation in the aftermath of the global economic crisis, since such policy might actually worsen sovereign default risk. The model works well for the euro-periphery countries; it is less robust for the euro-candidates that upon a future euro adoption will have to pursue real economy growth oriented policies in order to mitigate a potential increase in sovereign default risk.

Keywords: sovereign default risk, euro area, euro-candidate countries, public debt, liquidity risk, counter-party risk

JEL Classification: E43, E63, G12

Suggested Citation

Gabrisch, Hubert and Orlowski, Lucjan T. and Pusch, Toralf, Sovereign Default Risk in the Euro-Periphery and the Euro-Candidate Countries (September 13, 2012). Available at SSRN: https://ssrn.com/abstract=2145780 or http://dx.doi.org/10.2139/ssrn.2145780

Hubert Gabrisch (Contact Author)

Wiesbaden Institute for Law and Economics ( email )

Friedrich-Kruse-Str. 10
D-06120 Halle, 06120
Germany

Lucjan T. Orlowski

Sacred Heart University - John F. Welch College of Business ( email )

5151 Park Avenue
Fairfield, CT 06825
United States
203-371-7858 (Phone)

HOME PAGE: http://www.sacredheart.edu/ltorlowski.cfm

Toralf Pusch

affiliation not provided to SSRN ( email )

Paper statistics

Downloads
45
Abstract Views
397