The Sovereign Debt Crisis in the Eurozone

The sovereign debt crisis in the Eurozone began with the global economic recession that started in 2008 in the USA, caused by a massive melt down in financial markets. After the crash of 2008, the sovereign debt increased for two main reasons. The first reason was because governments assumed private debt (primarily bank debt). The second reason derived from the automatic stabilizers set in motion by the recession-induced decline in government revenues. In this scenario, there was a drastic increase in the interest rate of government bonds, especially for PIIGS countries (Portugal, Ireland, Italy, Greece, Spain). However it seems very difficult to explain this enormous increase exclusively through the theory of speculative attacks triggered by the worsening of fundamentals, especially if inconsistent macroeconomic policies were not in place. The main goal of this work is to indagate the determinants of the spread increase taking into account the fundamentals deterioration and the self-fulfilling speculative attack on euro currency.