Euro Zone Debt Crisis: "How it Escalated into a Crisis with a Huge Impact Within the Whole Group"

Abstract

Economic crisis have shown to be periodical. They are encountered during the history in different forms; still it has a common characteristic. In this master thesis, the main focus is the sovereign debt crisis which Euro zone is currently living. The issues discussed are: how it all started and how come no country was able to predict what was soon turning to be one of the harshest crises in the history. It is introduced the case of the most problematic countries also known as PIIGS: Portugal, Italy, Ireland, Greece and Spain. There have been concerns that the PIIGS countries could default on their debts, and as such the crisis turned into a confidence crisis. An important focus is given to the policies undertaken by the European institutions towards responding to the crisis. The model performed, includes the factors that contributed to the crisis and their correlation. The factors are the ratings made by the credit rating agencies, unemployment levels, trade balances as percentage of GDP, Deficit as percentage of GDP and Bond yield as percentage of GDP. The countries included in the study are the PIIGS countries and the developed countries: Germany, France and Belgium. The time interval starts from 2001, when the countries were officially part of the euro zone, since the euro was widely distributed, to 2012. The methodology used is the panel data regression model (Stata). From Hausmann test performed, the fixed effect model was chosen. Credit ratings of Fitch and Standard and Poor’s used as dependent variables, have a strong correlation implied from results. The model is explained by the independent variables, but lacks in showing which specific country has the strongest correlation.