Research On The Contagion Effect Of Eurozone Sovereign Debt Crisis

Crises have encompassed the global economy since2007, such as the global financial crisis triggered by American subprime crisis and the Euro zone debt crisis as a representative of the developed countries’sovereign debt crisis. Because the two crises are closely linked in time period and economy cooperation, many scholars believe that American subprime crisis acts as a severe external shock to the Euro area, and the Euro zone debt crisis is the continuation of the subprime crisis. Eurozone debt crisis began in late2009, when the Greek government exposed a large number of sovereign debt. Soon three famous international credit rating agencies continuously downgraded Greece’s sovereign credit ratings, after which Greek crisis broke out. Afterwards, the crisis quickly spread to Ireland, Portugal, Spain and ITly, who applied to the Eurozone Union and the IMF for aid, one after another. In order to limit the crisis’fall-out on the affected countries and prevent further spreading, the EU government took a series of extraordinary measures. However, these measures did not quell the crisis, and the crisis turned into political field. Then, whether American subprime crisis has significant external shock to the euro area? How the contagion effect goes in the euro area? This paper focuses on the most representative five countries, known as PIIGS, and studies the contagion effect of the sovereign debt crisis in euro area.Based on empirical analysis, this paper studies the external shock of subprime crisis to euro area and the internal contagion effect within the five countries in eurozone. Four parts are formed as follows:(1) Review related literatures about debt crises, relation between the two crises and contagion effect. Existing deficits and the significance of this paper are also concluded;(2) Elaborate on the basic theories of this paper, summarizing the features and reasons of the Eurozone debt crisis and clarifying the definition, classification and measurement of contagion effect of financial crisis. Relevant data is also provided for examples;(3) Empirically research on the external shock of subprime crisis to the eurozone: firstly, describe the statistics of related data; secondly, establish a VAR model to analysis the external shock, based on the monthly10-year government bond yield of America, Greece, Ireland, Spain and Italy;(4) Empirically research on the internal contagion effect within eurozone, and three parts are formed:firstly, analysis the similarity of PIIGS to judge whether there exists contagion effect among countries; secondly, establish a GARCH model to check whether the Greek crisis is the source of contagion of the Eurozone debt crisis, which further lays a foundation for the following empirical analysis; thirdly, establish a VAR model and conduct the Granger causality test and impulse response analysis to verify the existence of contagion effect.Results show that:(1) America is the Granger cause of the four euro countries, and the subprime debt crisis has a significant contagion effect on the eurozone debt crisis;(2) In the euro zone, Greek crisis is the contagion source of "PIIGS"; according to the Granger Casualty Test, the crisis spread from Greece to Ireland, Portugal, Spain and Italy in turn, which correspond with the breakout sequence of the PIIGS crises;(3) There is significant contagion effect within the eurozone:an increase in the long-term government bond yields of Greece directly causes the same direction changes of the other four countries; In addition, Ireland suffers most contagion effect from Greece while Portugal the least, which may be due to specific causes of each country’s crisis.