Macroeconomic imbalances, financial stress and fiscal vulnerability in the euro area before the debt crises: A market view

Gilles Dufrénot (1, 2) , Karine Gente (1) , Frédia Monsia (1)

1 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille
2 CEPII - Centre d'Etudes Prospectives et d'Informations Internationales

This paper tries to identify the macro-financial imbalances that exposed the euro area countries to fiscal stress before the outbreak of the European debt crises. Contrary to conventional wisdom that interprets fiscal stress in terms of fiscal sustainability, we focus on short-term fiscal vulnerability as reflected by the conditions of debt refinancing in the sovereign bond markets. We find that market-based indicators capturing risk perceptions of sovereign debts have been influenced by the indicators defined in the European Macroeconomic Imbalance Procedure (MIP) and by variables of financial vulnerability. When pricing the risk of sovereign bonds, the holders of government debts take into account, not only the macroeconomic imbalances, but also factors such as banking distress, corporate bond risk, liquidity risks in the interbank market or the volatility of stock prices.

Keywords: Economie quantitative

Domains: Humanities and Social Sciences; Humanities and Social Sciences; Economics and Finance

Gilles Dufrénot, Karine Gente, Frédia Monsia. Macroeconomic imbalances, financial stress and fiscal vulnerability in the euro area before the debt crises: A market view. Journal of International Money and Finance, 2016, 67, pp.123--146. ⟨10.1016/j.jimonfin.2016.04.002⟩. ⟨hal-01440301⟩