Library Header Image
LSE Research Online LSE Library Services

Mispricing of sovereign risk and multiple equilibria in the Eurozone

de Grauwe, Paul and Ji, Yuemei (2012) Mispricing of sovereign risk and multiple equilibria in the Eurozone. CEPS working documents (316). Centre for European Policy Studies, Brussels, Belgium. ISBN 9789461381620

Full text not available from this repository.


This paper finds evidence that a significant part of the surge in the spreads of the PIGS countries (Portugal, Ireland, Greece and Spain) in the eurozone during 2010-11 was disconnected from underlying increases in the debt-to-GDP ratios, and was the result of negative market sentiments that became very strong since the end of 2010. We also find evidence that after years of neglecting high government debt, investors became increasingly worried about this in the eurozone, and reacted by raising the spreads. No such worries developed in stand-alone countries despite the fact that debt-to-GDP ratios were equally high and increasing in these countries. We interpreted this evidence as validating the hypothesis formulated in De Grauwe (2011) according to which government bond markets in a monetary union are more fragile and more susceptible to self-fulfilling liquidity crises than in stand-alone countries. We argue that the systematic mispricing of sovereign risk in the eurozone intensifies macroeconomic instability, leading to bubbles in good years and excessive austerity in bad years.

Item Type: Monograph (Working Paper)
Official URL:
Additional Information: © 2012 Centre for European Policy Studies
Divisions: European Institute
Subjects: H Social Sciences > HG Finance
J Political Science > JZ International relations
JEL classification: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects)
F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems
Date Deposited: 08 Oct 2012 09:03
Last Modified: 19 Dec 2020 00:39

Actions (login required)

View Item View Item