An Analysis of Sovereign Debt Crisis in a Currency Union
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The global financial crisis of 2007 came as a surprise to many academics and scholars throughout the world. Unforeseen by many, the crisis sent shockwaves throughout the financial world, taking economies hostage as policy makers had little time to prepare or the ability to stop them from reaching their shores. Developed country sovereign debt is seen by fixed income security investors as “riskless” whereby investors use them to benchmark the returns of any added risk other investments may provide. Therefore, it is important for investors to try and foresee any potential risks that may arise in the so-called ‘riskless investments’ they invest in. This dissertation attempts to answer the following two questions: 1) Was the European Central Bank (ECB) able to abate moral hazard when performing a bailout, 2) To which degree does trade intra-union versus trade extra-union influence debt yield spreads of Eurozone member countries. This dissertation finds that the ECB was generally able to abate the moral hazard when performing a bailout. This dissertation also finds that the volatility of terms-of-trade outside the union has a significant influence on debt yield spreads.