ABSTRACT
This paper examines the factors that contributed to the debt crisis of Euro-zone countries, in particular for those five Euro-zone countries receiving bailouts, namely Greece, Ireland, Italy, Portugal and Spain. These five countries were known for not being able to borrow and service their existing debt during the great recession caused by global financial crisis of 2008.The factors to be examined in this paper include sovereign cost of borrowing, currency appreciation, current account balance, government budget deficit and government debt. The Probit regression model is used to examine the determinants contributing to a higher probability of causing the five Euro-zone countries experiencing severe debt crisis. Using annual data from 1999 to 2012 covering eleven Euro-zone countries, this paper finds that sovereign cost of borrowing, government debt and current account balance are significant determinants. In particular, results show that higher sovereign cost of borrowing and more excessive government debt are associated with greater probability of incurring debt crisis. On the other hand, lower current account balance is associated with greater probability of incurring debt crisis, while currency depreciation/appreciation and government surplus/deficit have no effect on the probability of incurring debt crisis.
Keywords
Euro-zone Debt Crisis, Government Debt, Government Budget Deficit, Sovereign Cost of Borrowing, Current Account Balance.