Essays on Debt Crises in Integrated Economies
Zuccardi Huertas, Igor Esteban
Vegh, Carlos A
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This dissertation thesis analyzes different aspects of the 2008-2013 debt crisis in the European Monetary Union (EMU): a) the sovereign debt market in the EMU before the crisis and, b) the spillover effects of the crisis on the real sector around the world. Chapter 1 provides an overview of the recent history of the EMU and highlights the contribution of this thesis to the literature. Chapter 2 studies the behavior of sovereign spreads of EMU countries and their apparent disconnection with country-specific fundamentals before the Eurozone debt crisis. We test three characteristics of spreads: i) a lower level of spreads, ii) a weak link between spreads and macroeconomic fundamentals, and iii) a reduction in the cross-country variance of spreads. We find that, in comparison to economies from other regions, spreads from EMU members are lower, the relationship of spreads with variables like fiscal balance, GDP growth rate, and public debt is weaker, and their cross-country variance is statistically lower than the cross-country variance of spreads from non-EMU countries between 1999 and end-2005. Without excluding alternative explanations for the behavior of pre-crisis sovereign spreads, these results are consistent with the existence of creditor moral hazard in the EMU's sovereign bond market before the crisis. Chapter 3 is coauthored with Dr. Stijn Claessens and Dr. Hui Tong. We analyze through what channels the EMU crisis has affected firm valuations and what the efficacy of various policy interventions to mitigate the crisis has been. We do so using stock price responses for 3045 non-financial firms in 16 countries to policy measures announced at four key events in 2010 and 2011. Using pre-crisis benchmarks, we separate effects arising from changes in financing conditions from trade effects and examines if bank or trade linkages propagated shocks across borders. We find that measures impacted financially-constrained firms more, particularly in creditor countries with greater bank exposure to peripheral Euro countries. Trade linkages with peripheral countries played a minor role, although Euro exchange rate movements led to some differential effects. This study concludes that interventions were mostly geared towards preserving creditor banks' ability to finance local firms.