The Eurozone sovereign debt crisis : an analysis of the Maltese economy's vulnerability to the financial contagion

Abstract

Since the escalation of the Greek sovereign debt crisis in the autumn of 2009, the Eurozone sovereign debt crisis has had a severe impact on the economic and financial environment in the euro area by unexpectedly introducing a massive amount of uncertainty about economic prospects in the region. The objective of this study is to analyse the deteriorating fundamentals which make an economy vulnerable to the financial contagion of the Eurozone sovereign debt crisis. This study begins by analysing the origins of the Eurozone sovereign debt crisis and what triggered it. It continues by identifying the various channels that facilitated the financial contagion to spread across the region. The author also investigates the fundamental vulnerabilities of the economies that were worst affected by the Eurozone sovereign debt crisis to date, namely Greece, Ireland, Portugal and Spain. The rest of the dissertation concentrates on the Maltese economy's susceptibility to the financial contagion and to the adverse spillover effects of the crisis. From the analysis conducted, the author concludes that the Maltese economy is undoubtedly in a much sounder position than the other Eurozone economies assessed in the previous section. However, a number of inherent weaknesses are identified which may expose Malta to the financial contagion and second-round effects of the crisis in the near future.