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Investigation into the Sovereign Debt Credit Ratings of Five EU Member States and China over the Period 2005-2012 - Literature review Example

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Investigation into the Sovereign Debt Credit Ratings of Five EU Member States and China over the Period 2005-2012

Caprio and Klingebiel (2003), McKinsey (2010), Mihalakas (2012) find that common problems existing in crisis countries are financial imbalances, government debt over the country's debt paying ability, huge public spending, which eventually lead to the occurrence of crisis. Calvo (1998), Eichengreen et al. (2005) and De Grauwe (2011) and Wolf (2011) all think that monetary union is one of the important factors. Detlef (2012) argues that large-scale sovereign debt is due to the endogenous structural problems. Leigh (2010) through the statistical methods to find low growth is another incentive to crisis. The financial crisis accompanied by the enormous public debt in the Euro zone particularly the Greece that occurred in 2009 resulted in a great confusion in the vast world financial market, this even became of in the year 2010 (Buckley & Arner, 2011). Despite this the International Monetary Fund (IMF) and the European Union (EU) have acted so fast to handle the crisis and restore the confidence of the market participants :( Portes, 1986). It did this through restoring the fiscal economies such as Greece, Ireland, and Portugal among others. However, the Euro zone crisis extended even in the first half of the 2011 through vigorously shaking the financial markets both internally and externally of the monetary union. This extended the thought that other countries would be rescued from the crisis later on. Although the countries mentioned so far are small economically, there was an exposure of through financial contagion and therefore the possibility of the scourge spreading to other countries of the EU like Spain and Italy, this has made handling of the crisis more complicated and serious. On the other hand, a variety of questions has been raised over whether the institutions conferred with the obligations of handling the issues will be up to the task (Buckley & Arner, 2011). The proponents of the advocacy that the monetary unions escaped national monetary and economic sovereignty are right though they lacked central fiscal authority :( Portes, 1986). It is quite evident that without such conferred authority; the organizations are toothless hence preventing the monetary union from effective action by the constituents. This therefore has made the recovery of the mentioned countries out of the debt crisis hence more muted than it would have been expected (Canuto & Giugale, 2010). For decades, the financial positions of the countries in the euro zone exhibited the strengths that have never been witnessed in the year 2007 (Canuto & Giugale, 2010). This had largely been attributed majorly due to the economic environments that facilitated the strongest view. The onset of the 2008-2009 financial crunches witnessed a longer and lasting impact in the economic environments of the countries in the EU (Buckley & Arner, 2011). This penetrated the economic environment in three major transmission channels, which entail: - the nature that the financial system is highly contagious and connected, the effects and impacts that demand had on wealth and confidence and lastly, the global trade ...Show more
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Summary

Date CHAPTER 2: LITERATURE REVIEW Since the outbreak of Euro zone sovereign debt crisis, many scholars write papers about cause, influence and related economic theory of the crisis and sovereign debt crisis in history. The most relevant with dissertation are as follows (Portes, 1986): 2.1 Cause of the Crisis The general characteristics of sovereign debt crisis either are debt-servicing difficulties in a country by defaults or by over critical threshold of its bond spread (Pescatori et al…
Investigation into the Sovereign Debt Credit Ratings of Five EU Member States and China over the Period 2005-2012
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