By Xu Jiang and Diana Žigraiová.
Is it possible to forecast tensions in market access? How does one measure such tensions and how do they evolve over time? Looking back at the experiences of Spain and Greece during the European debt crisis and the ongoing pandemic helps to answer these questions. In the run-up to the European sovereign debt crisis, several financial and macroeconomic indicators already signalled a build-up of stress in the debt markets. Now, the situation looks much better, with vulnerabilities broadly contained, although some indicators have started flashing amid the current pandemic crisis.
In this blog post, we will show that macro-financial indicators can signal risks to market tensions before they materialise, giving policy-makers as much as a year forewarning to tailor a response to the unique origin and impact of each crisis. Economic discipline and reforms stemming from the debt crisis as well as timely and appropriate policy response are helping European countries to better tackle new crises such as the Covid-19 pandemic today.
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