The Greek debt debacle and the role of external debt in the EMU sovereign debt crisis and the ensuing landscape for peripheral european sovereign borrowers

Abstract

This dissertation investigates the European Monetary Union (EMU) Sovereign Debt Crisis from a capital markets perspective. The realisation in 2009 that the Greek government owed much more than had been previously thought is taken as the starting point of the analysis. These concerns quickly spread to other European countries causing Markets to doubt the viability of the very existence of the EMU and the Euro. The belief that all EMU borrowers paid roughly the same cost for issuing debt ceased to exist. The European Union responded to this crisis by taking several emergency measures including the absorption of bonds issued by the weaker EMU states either as collateral via liquidity injection measures as well as purchases via quantitative easing. It provided Greece, and subsequently Ireland and Portugal with a de facto bailout solution, and in order, to fund such bailout started issuing pan-EMU debt through, what some contended to be quasi-Collateralised Debt Obligation structure: The European Financial Stability Facility (EFSF). My dissertation seeks to investigate European Sovereign Debt Crisis from a capital markets perspective, mainly by analysing the way in which spreads for debt issued by core and peripheral EMU countries behaved before and during the sovereign debt crisis. The analysis shows that spreads for the PIIGGS (Portugal, Italy, Ireland, Greece, Great Britain and Spain) widened during the crisis with the exception of those of Great Britain, which obviously enjoyed the dynamics related to a different currency - the Pound Sterling. However, Malta's sovereign spreads were also compared to the core EMU borrowing cost- the Euro Benchmark. It was found that the Maltese sovereign remained constant throughout the crisis, amidst a comparatively better economic performance. I argue that the fact that an EMU sovereign such as Malta, that funded itself exclusively domestically, and did rely on external borrowing through the issue of Eurobonds was not subjected to the indiscriminate assessment of lenders and speculators in the Debt Capital Markets in order to finance itself and refinance its maturing debt.