Modelling the sovereign debt crisis in Europe

This article examines the impact of rising bond yields in certain Euro Area countries on debt sustainability. It concludes that without the financial assistance of the bailout packages, government debt in Greece would clearly have been unsustainable, while Ireland and Portugal would have been extremely vulnerable. The authors also examine the case of vulnerable countries which have not received bailouts – Italy, Spain and Belgium. The authors conclude that while they can absorb some temporary rise, as has been seen in the spring of 2011, a significant further sustained rise – more than 100–200 basis points – would call their solvency into question in the absence of financial assistance.