Pure or Wake‐up‐Call Contagion? Another Look at the EMU Sovereign Debt Crisis

We test whether the sharp increase in sovereign spreads of euro‐area countries with respect to Germany after the explosion of the Greek crisis was due to deteriorating macroeconomic and fiscal fundamentals or to some form of financial contagion. Our analysis includes indicators of domestic and external imbalances which were mostly disregarded by previous studies, and distinguishes between investors' increased attention to the variables which ultimately determine the creditworthiness of a sovereign borrower (wake‐up‐call contagion) and behaviour not linked to fundamentals (pure contagion). We find evidence of wake‐up‐call contagion but not of pure contagion.