Σύνοψη

THE GREEK FINANCIAL CRISIS: GROWING IMBALANCES AND SOVEREIGN SPREADS

Heather D. Gibson

Bank of Greece

Stephen G. Hall

University of Leicester

George S. Tavlas

Bank of Greece*

ABSTRACT

We discuss the origins of the Greek financial crisis as manifested in the growing fiscal and current-account deficits since euro-area entry in 2001. We then provide an investigation of spreads on Greek relative to German long-term government debt. Using monthly data over the period 2000 to 2010, we estimate a cointegrating relationship between spreads and their long-term fundamental determinants (including a measure of the fiscal situation, competitiveness of the Greek economy, economic activity and oil prices, reflecting the high dependence of the Greek economy on imported energy) and compare the spreads predicted by this estimated relationship with actual spreads. We find that spreads were significantly below what would be predicted by fundamentals from end-2004 up to the middle of 2005; by contrast, since May 2010, actual spreads have exceeded predicted spreads by some 400 basis points.

JEL Classification: E63; G12

Keywords: Greek financial crisis, sovereign spreads

Acknowledgements: We would like to thank colleagues at the Bank of Greece for assistance with data collection, in particular, Elena Argiri, Eleni Gazopoulou, Dora Kosma, Katerina Kotsoni and Angeliki Momtsia. The views expressed do not necessarily reflect those of the Bank of Greece.

George S. Tavlas

Bank of Greece

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