As the European Union emerges from its worst recession since the Second World War, it has to tackle an equally pressing issue: a sovereign debt crisis. Yield spreads in Greece, Portugal, Ireland and Spain have soared. The era of cheap government borrowing and integrated euro area (EA) government bond markets appears to be over, and fractures in EA solidarity are present. This dissertation seeks to update existing literature by assessing the current state of government bond market integration in the EA. Results suggest that many years of financial integration in EA government bond markets has been reversed in a few months, and that the status quo is not sustainable for the peripheral member countries. Unless Greece, Portugal, Ireland and (to a lesser extent) Spain adopt significant microeconomic structural reforms to regain long-lost competitiveness vis-à-vis the EA’s core (notably Germany), whilst at the same time avoid falling back into deep recession, the Euro project will not be able to continue in its current form.
Table of Contents
1.0 Introduction
1.1 Research objectives
2.0 Literature review
2.1 Financial integration – definitions, costs, benefits and barriers
2.1.1 European economic integration
2.1.2 Definitions of financial integration
2.1.3 Benefits and costs of financial integration
2.1.4 Barriers to financial integration
2.2 Financial integration in the run-up to the financial crisis
2.3 High debt Europe
3.0 Methodology – measuring financial integration
3.1 Price-based measures
3.2 News-based measures
3.3 Cointegration
3.4 Other measures
3.5 Data considerations
3.6 Risk adjustments
3.7 Nominal or real rates
4.0 Data
5.0 Results – macroeconomic analysis and measurements of financial integration
5.1 Macroeconomic analysis of the euro area periphery
5.2 Correlation coefficient analysis
5.3 Price-based measures of integration
5.3.1 Yield spreads
5.3.2 Cross-sectional dispersion
5.4 News-based measures of integration
5.4.1 Conditional betas
5.4.2 Variance ratio
5.5 Jumping cointegration analysis
6.0 Conclusions
7.0 References
Research Objectives & Topics
This dissertation aims to evaluate the current state of government bond market integration within the euro area, specifically focusing on the peripheral economies of Greece, Ireland, Portugal, and Spain, in the context of the sovereign debt crisis and global financial instability.
- Impact of the global financial crisis on sovereign debt yields.
- Macroeconomic analysis of the euro area periphery.
- Statistical and econometric techniques to measure financial market integration.
- The relationship between structural fiscal deficits and long-term interest rates.
- Evaluation of financial disintegration trends from 1992 to 2010.
Extract from the Book
2.1.1 European economic integration
There are five levels of economic integration (illustrated in Figure 1), each building on the previous level. At the most preliminary level there is a Free Trade Area, which is a group of countries with zero barriers to trade of goods and services between members, an example of which is the European Free Trade Association (EFTA). Second is a Customs Union, which adds a common external trade policy. Third is a Common Market, which allows factors of production to move freely between member states and requires a great degree of fiscal-, monetary- and employment policy harmonisation and cooperation. Fourth is an Economic Union, which adds a common currency, harmonization of tax rates, and common monetary and fiscal policies. Some EU members signed up to a common currency in 1999 and became a quasi-Economic Union, known as the EA, which now consists of sixteen members (Hill, 2010, and Krugman and Obstfeld, 2006).
Chapter Summaries
1.0 Introduction: This chapter introduces the sovereign debt crisis affecting Greece, Ireland, Portugal, and Spain and outlines the dissertation's objective to analyze the impact of recent financial crises on bond market integration.
2.0 Literature review: This section covers theoretical frameworks of financial integration, discusses barriers to integration, and examines the impact of high public debt levels on the euro area peripheral states.
3.0 Methodology – measuring financial integration: This chapter details the quantitative methods used, including price-based measures, news-based measures, and rolling cointegration analysis to assess market integration.
4.0 Data: This section describes the data sources used for the analysis, spanning from September 1992 to September 2010, and presents descriptive statistics of the government bond series.
5.0 Results – macroeconomic analysis and measurements of financial integration: This chapter presents the empirical findings, including macroeconomic analysis and the results of the various integration measures, showing clear signs of financial disintegration in the periphery.
6.0 Conclusions: The final chapter summarizes the findings, confirming that years of financial integration have been reversed due to the crisis and discussing the necessity of structural reforms for future stability.
Keywords
Financial integration, Euro area, sovereign debt crisis, government bond yields, economic union, market disintegration, yield spreads, macroeconomic analysis, fiscal deficit, structural reform, peripheral economies, cointegration, monetary policy, market liquidity, credit risk.
Frequently Asked Questions
What is the core focus of this dissertation?
The paper examines the state of government bond market integration in the euro area, specifically focusing on how the sovereign debt crisis has affected Greece, Ireland, Portugal, and Spain.
What are the primary themes of the research?
The research explores the impact of financial crises on market integration, the relationship between national fiscal health and bond yields, and the challenges of maintaining a monetary union without a fiscal union.
What is the main research objective?
The aim is to analyze how the global financial crisis and subsequent sovereign debt crisis have caused market disintegration and impacted sovereign debt yields in peripheral euro area economies.
Which methodologies are employed to measure integration?
The study utilizes price-based measures (yield spreads, cross-sectional dispersion), news-based measures (conditional betas, variance ratio), and an innovative rolling (jumping) cointegration technique.
What does the main body of the work address?
The main body combines a review of existing literature on integration, a macroeconomic analysis of the four target countries, and an empirical application of econometric models to bond market data.
What are the key descriptors for this study?
Key terms include financial integration, euro area, sovereign debt crisis, market disintegration, and government bond yields.
How does the author characterize the "GIPSY Club"?
The author refers to this group as the states most fragile following the financial crisis, experiencing significant difficulties in adjusting their economies due to low savings rates and high debt.
Why is the "law of one price" relevant to this analysis?
The author uses the law of one price as a primary proxy for financial integration, assuming that in perfectly integrated markets, identical assets should offer identical returns.
What role does the German Bund play in the study?
The German 10-year government bond is used as the benchmark asset because Germany is considered the strongest and most developed economy within the euro area.
What conclusion is drawn regarding market integration?
The study concludes that the significant financial integration achieved in the 2000s was reversed following the 2008 financial crisis, leading to a profound disintegration of bond markets in the periphery.
- Quote paper
- Marc Blunden (Author), 2010, An assessment of the current state of government bond market integration in the periphery of the euro area, Munich, GRIN Verlag, https://www.grin.com/document/307539
