In the wake of the financial crisis, sovereign debt crisis has emerged and is severely affecting some countries in the European Union, threatening the viability of the euro and even the EU itself. This paper applies recent developments in econophysics, in particular the minimum spanning tree approach and the associate hierarchical tree, to analyze the asynchronization between the four most affected countries and other resilient countries in the euro area. For this purpose, daily government bond yield rates are used, covering the period from April 2007 to October 2010, thus including yield rates before, during and after the financial crises. The results show an increasing separation of the two groups of euro countries with the deepening of the government bond crisis.
In the aftermath of the recent financial and economic crisis, many European Union (EU) member states, as well as countries in other regions, have significantly raised their budget deficits and public debts. One such example is the case of Greece, which recorded a government debt and budget deficit representing 126.8% and 15.4% of Gross Domestic Product (GDP) respectively in 2009. This unsustainable situation created difficulties in accessing international financial markets and a new crisis emerged, this time related to government bonds.
After Greece, Ireland became the next country to draw on financial assistance from the EU and the International Monetary Fund (IMF), with Portugal following some months later. Spain also has been impacted by high government bond yield rates although its budget and debt problems are not of the same magnitude as those of the other three countries. Nevertheless, strong pressure has loomed over the euro area, given that other countries, such as Italy or Belgium, have also accumulated large public financial imbalances. There is now an increasingly widespread fear that the Euro might be in jeopardy, with even the European Union itself called into question as a project for economic and political integration in Europe, should this crisis not be contained.
In this paper, sovereign debt crisis in the European Union is analyzed with tools developed and largely applied in the field of econophysics. The euro area is of particular concern and, thus, the main focus of the paper lies in the network topology of the eurozone members. The minimum spanning tree (MST) provides the main analytical approach and the dynamics of daily government bond yields are investigated using rolling windows of three months, from April 2007 through October 2010. Our methodology is similar to that used in a recently published paper in this journal [1], related to comovements in government bond markets over 1993–2008. Like in this latter paper, we also base our analysis on minimum spanning trees, hierarchical trees and use rolling windows. However, our subject is different, since we are interested in the analysis of the current sovereign debt crisis in the EU. Although we use 10-year government bold yield rates as well, the country composition (only EU countries), period under analysis (last four years) and even frequency of data (daily values) are quite distinct. Besides, we use a larger set of measures in the rolling windows.
In addition to this Introduction, the paper is structured as follows. Section 2 briefly describes the data used. Section 3 explains the methodology adopted and Section 4 presents the results obtained. Finally, Section 5 draws the main conclusions.
Following the recent financial and economic crisis, a new budgetary and debt turbulence has emerged in Europe, and some countries of the euro zone are being particularly afflicted by this new crisis. Greece, Ireland, Portugal and even Spain are now at the center of this turbulence. This is a serious problem not only for the countries concerned but also for the euro as a currency adopted by a large number of European Union member states. The very future of the European Union may be at stake should the euro collapse. The level of this danger rises with the time taken to bring the crises under control, as contagion to other countries would have dramatic consequences. For example, in addition to this group of four countries (not equally impacted, in particular Spain has thus far remained in a better position to access international financial markets than the other three countries), Italy and Belgium are becoming the object of some concern, and certainly other countries would follow should the situation in this group deteriorate.
Our analysis of the evolution of government market bond yields for nineteen EU countries, covering daily rates for the period from April 2007 up to October 2010, has provided a coherent topological description of the current government bond crisis in the European Union, clearly revealing the asynchronization in the evolution of bond yields in the euro zone and the formation of two distinct and increasingly separate blocks in this area. This was achieved by applying the MST approach both for three different periods and by using a rolling window in order to observe the evolution of some relevant aspects of the MST, over a period extensive enough to differentiate between three distinct situations: before the financial crisis, during the financial crisis and during the sovereign debt crisis. While Germany, France and Netherlands always appear strongly linked together throughout the different periods (the E3 core), Greece, Ireland, Portugal and Spain have progressively joined in an isolated cluster and separated off from the E3 core both in the MST and the hierarchical tree.
The situation of the sovereign debt crisis in the euro area has been recently deteriorating, threatening also other countries in the area. This shows clearly the lack of a permanent regulatory mechanism in the eurozone to prevent and solve this type of problems but also some political fragilities at the EU level to consolidate the European integration.
