by Michael G. Arghyrou and Alexandros Kontonikas
Greek Economists for Reform
November 6, 2010
We summarise the findings of a research project we have recently completed on the European sovereign debt crisis. We find a marked shift in market pricing behaviour from a ‘convergence-trade’ model before August 2007 to one driven by macro-fundamentals and international risk thereafter. We do not find evidence of any significant role for momentum-trading speculation in the CDS market. The escalation of the Greek debt crisis in November 2009 is confirmed as the result of an unfavourable shift in market expectations, caused by the hesitation of Greek authorities to commit to structural reforms. Our findings highlight the necessity of structural reforms in periphery EMU countries increasing competitiveness. For Greece, the crisis calls for a thorough plan of economic reconstruction, not short of a supply-side revolution, aiming to reform the deeply problematic public sector and substantially improve competitiveness.
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