Three Essays on the European Sovereign Debt Crisis with a Special Focus on Greece

Abstract

This dissertation consists of three chapters where I examine several aspects of the European sovereign debt crisis. The first chapter focuses on systemic risk. Following the financial crisis of 2007-08, both in academic as well as policy circles, much of the research has focused toward the systemic importance of financial institutions. Parallel to that research, but to somewhat lesser extent, there have been improvements in our understanding of how risk is transmitted from the financial system to the real economy. This chapter investigates a related yet distinct manifestation of systemic risk, namely systemic sovereign risk. Using data on sovereign credit default swap spreads from 11 euro member countries the study seeks to examine how the sovereign risk of one member country can affect others, as well as the overall impact in the system. The proposed work is based on the approach of Adrian and Brunnermeier (2010), used to assess systemic risk contributions among financial institutions. Focusing on sovereigns rather than financial institutions, this work will expand a small but growing body of literature examining the recent European sovereign debt crisis. In the second chapter I present a brief overview of the stylized facts for the Greek economy starting from the period after the end of the military dictatorship and the transition to democracy up until early 2016. In the third chapter I revisit the issue of fiscal sustainability in Greece in a retrospective framework, meaning that our interest lies in evaluating the sustainability of past fiscal policies and whether these can lead to a sustainable fiscal path. My empirical analysis uses annual data from 1970 to 2015 from a single source (AMECO). The econometric methodology is divided into two parts. In the first part, I focus on the sustainability of government debt using unit root tests that allow for structural breaks. In the second part, I test for cointegration between government revenues and expenditures with two procedures, namely the Bounds test of Pesaran and Shin and Johansen\u27s test. The results from both the unit root tests and the cointegration tests indicate Greek fiscal policy is unsustainable. In order to account for structural breaks, I employ the methodology of Bai (1997) and Bai and Perron (1998) and incorporate the breaks when testing for cointegration between government revenues and expenditures. The methodology employs the Dynamic OLS framework of Stock and Watson (1993). Even when I account for structural breaks, I find no evidence of strong form sustainability between the two series. However, my results do not reject the weak form sustainability of Quintos (1995). I argue that evidence of weak form sustainability for Greece can be interpreted as a higher risk of unsustainability, which can be used to explain Greece\u27s current fiscal distress