Vox
January 23, 2012
Economists now agree that markets were wrong in placing the same risk premium on Greek bonds as on German bonds. But this column adds that today the same markets are also wrong in overestimating the risk that the periphery countries will default. Policymakers looking to calm such skittish markets should take note.
It is widely acknowledged that Eurozone financial markets were systematically wrong from 2001 to 2008 when they charged the same risk premium on Greek and German government bonds despite huge differences in their debt-to-GDP ratios.
Today, the same markets are applying huge spreads on Greek and other Eurozone government bonds. Many economists view today’s spreads as correct. But why – if markets were systematically mispricing risks from 2001 to 2008 – should we believe these same markets have suddenly found the truth? (See Attinasi et al 2010 for how quickly the spreads widened.)
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