The EMU sovereign-debt crisis: Fundamentals, expectations and contagion

► We model euro area sovereign bond yield spreads over the period 1999.01-2011.08. ► Before the global credit crunch bond markets priced only expected fiscal positions. ► During the crisis markets price international risk and macro-fundamentals. ► The Greek debt crisis is due to deterioration in fundamentals and expectations. ► Contagion effects are present, particularly among EMU periphery countries.