The determinants of Greek bond yields: an empirical study before and during the crisis

Abstract

Purpose – The purpose of this paper is to uncover the determinants of the ten-year Greek bond yield in both pre- and post-crisis period that caused the unprecedented event, a country member of the Euro area, not to be able to tap the market. In doing so, following the recent literature, the authors employ two major set of variables, market driven and macroeconomic variables and the authors find two classes of results. Among others, debt to GDP ratio, deficit, inflation and unemployment, play a more significant role as determinants of the ten-years Greek bond yield during the crisis and second, the ten-years yield exceeds that fundamentals that price in. Moreover, the authors explicitly test for the impact of speculation on the yield. These results are in line with other empirical studies and shed line to the dramatic evolution of the bond yields in terms of fiscal consolidation era as it is in Greece. Since the Greek debt crisis is ongoing more than five years, policy makers should make substantial changes in their macro projections taking under consideration more the variables of inflation and unemployment, and release a viable concrete plan of debt relief, which among other, secures the success of the macro projections. Design/methodology/approach – Empirical study on Greek debt crisis applying both macroeconomics and market indicators in separated estimations. Findings – Debt to GDP ratio, deficit, inflation and unemployment among others, play a more significant role as determinants of the ten-years Greek bond yield during the crisis than had before and second, during the crisis ten-years yield is above the price that fundamentals would imply. Originality/value – To the best of the authors’ knowledge it is the first time that the authors study the Greek debt crisis applying fundamental and market factors.