ABSTRACT
The global credit crisis of 2007‒2009, which originated in the US subprime loan market, influenced not only its country of origin, but also the financial system in the European Monetary Union (EMU). As the crisis hit the EMU economy and its banking industry faced a large crash, governments provided capital injections or guarantees for financial sector liabilities and resorted to aggressive fiscal stimulus measures. The resulting fragility of the banking sector became one of the factors used to explain sovereign spreads in the Euro area (Sgherri and Zoli, 2009). After excessive debt issuance, some peripheral countries received negative perceptions by market participants about their fate, resulting in the onset of the sovereign debt crisis in Greece. The problems in Greece also generated fear about heavily indebted countries such as Portugal, Ireland, Italy, and Spain. Thereafter, the EU and IMF agreed on bailout packages for Ireland and Portugal, as well as Greece. That both crises triggered such chain reactions across countries spurred considerable interest in the cross-country spillover effects of shocks or in other words, contagion.
