Tag Archives: Spread

Contagion in the Euro Area

In a Vox column, Michal Kobielarz, Burak Uras and Sylvester Eijffinger argue that the  re-emergence of spreads between peripheral and core Eurozone countries at the beginning of the Greek crisis reflected contagion fears. They write:

… we explicitly model the endogenous bailout decision of the European Monetary Union. We assume that:

  • A country that defaults on its sovereign debt can no longer remain in the EMU, unless it is bailed out;
  • The union values each country’s membership and, therefore, suffers a loss if a country exits; and
  • The marginal loss associated with allowing a country to leave the union is highest if that particular country is the first to leave (first-exit effect).

… once the first country is gone, letting a second country default and leave the union is not that costly anymore.

“Die Zukunft des Euros (The Euro’s Future),” FuW, 2011

Finanz und Wirtschaft, February 23, 2011. PDF. Ökonomenstimme, March 1, 2011. HTML.

  • A banking crisis doesn’t imply a currency crisis.
  • Spreads on periphery bonds signal credibility of the ECB.
  • Debt restructuring must not be excluded as a policy option.