Debt Contagion in Europe: A Panel-Vector Autoregressive (VAR) Analysis

The European sovereign-debt crisis began in Greece when the government announced in December, 2009, that its debt reached 121% of GDP (or 300 billion euros) and its 2009 budget deficit was 12.7% of GDP, four times the level allowed by the Maastricht Treaty. The Greek crisis soon spread to other Economic and Monetary Union (EMU) countries, notably Ireland, Portugal, Spain and Italy. Using quarterly data for the 2000–2011 period, we implement a panel-vector autoregressive (PVAR) model for 11 EMU countries to examine the extent to which a rise in a country’s bond-yield spread or debt-to-GDP ratio affects another EMU countries’ fiscal and macroeconomic outcomes. To distinguish between interdependence and contagion among EMU countries, we compare results obtained for the pre-crisis period (2000–2007) with the crisis period (2008–2011) and control for global risk aversion.