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JEL Classification:

C32, C33, E42, E44, E62, F31, F33, F41, G01, G12,H63

Abstract

This paper explores the determinants of 10-years sovereign bond spreads over the German Bund benchmark in the Euro Zone from 2000 to 2012, relying on cross-country quarterly data panel analysis. The paper's focal point is the role of contagion and euro break-up risks in widening the sovereign bond yield differentials among EU member countries. Using a novel synthetic index capable of monitoring the sustainability of currency unions, the paper finds that market expectations of a euro's break up and contagion from Greece were fundamentals drivers of sovereign risk premia in peripheral countries.

Keywords:

Monetary unions, speculative attacks, self-fulfilling ex-pectations, multiple equilibria, shadow exchange rate, financial crisis, contagion, spreads, sovereign default risk, euro break up risk