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Monday, May 19, 2014

Transmission of Financial Stress in Europe: The Pivotal Role of Italy and Spain, but not Greece

IMF working paper , Apr.2014 (pdf)

Changes in the credit ratings of Greek sovereign debt, including news announced in the first quarter 2010 related to Greece’s bailout package, had no statistical effect on Germany’s SCDS.... One possible explanation for this is that Greece is seen as a country too small to affect Germany’s risk profile. In contrast, Italy and Spain–being much larger economies–could potentially destabilize Germany or the euro area, even though their likelihood of running into financial difficulties was perceived by the markets as comparatively smaller, based on their SCDS spreads

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