The Forces Driving the Euro-Area Sovereign Debt Crisis: International Risk, Fundamentals, Expectations, and Contagion

A year following its onset the euro-area sovereign debt crisis continues unabated. Starting from Greece in autumn 2009, the crisis has since resulted in Greece’s withdrawal from international bonds markets and continues to put the bonds of Ireland, Portugal and Spain under significant pressure. To contain its fall-out, in May 2010 EU/EMU policy makers took extraordinary measures including an unprecedented in size (110 billion) EU/IMF-financed Greek rescue package; and the creation of a European stabilisation mechanism setting aside 750 billion euros for coping with crises similar to the Greek one over the next three years. These measures, however, have so far failed to calm markets, with the ongoing turmoil causing debates ranging from the crisis optimal short-run management to the euro’s long-term sustainability.