Convergence in sovereign debt ratios across heavily indebted EU countries: evidence from club convergence

Abstract

We study the convergence of sovereign debt accumulation in five European Monetary Union (EMU) countries using quarterly data from June 2009 to June 2013, with a focus on debt ratio convergence following the 2009 sovereign debt crisis and the adoption of fiscal consolidation programmes. We test the Phillips and Sul (2007) club convergence hypothesis. We find the evidence of a lack of debt convergence for Greece and Portugal. Our results support the view that there is not a uniform austerity prescription for all, especially, without emphasizing friendly growth policies, which makes these countries more prone to investors’ sentiments.

Keywords:

• debt ratios
• convergence
• club convergence approach
• countries under fiscal consolidation

JEL Classification:

• H62
• H63
• C33

Notes

¹ Following the recommendation of PS, we choose r-values in the interval [0.2, 0.3].