That's a finding from a study by Paolo Manasse and Luca Zavalloni at the University of Bologna that attempted to statistically isolate the factors that were causing some countries to see more financial stress than others in periods of crisis contagion.
The research, a summary of which is available at the economics policy blog VoxEU, looked at the spreads on sovereign debt credit default swaps -- considered a good measure of investors' lack of confidence in specific countries -- and tried to isolate idiosyncratic factors that were causing specific nations to get hammered by the markets at specific moments within a crisis, or with more intensity than neighboring countries.
You get more or less what you expect. Countries like the UK, Austria and Ireland were very largely affected by banking crisis in 2008. They got a lot of imported risk immediately. Norway and Sweden also, Manasse, the lead economist on the paper, said. When you move into Greece, Italy and Spain, you see they are hit with some contagion in 2008, but that's not the main thing. The contagion from sovereign risk overwhelms the banking risk.
But not all findings validated conventional wisdom. The paper, for example, found that being a euro zone country, having a high level of public debt and experiencing high unemployment all made countries feel more severe effects from the contagion of the financial crisis. But during the actual crisis, high unemployment was nearly four times as powerful a factor in causing severe contagion effects than a high debt load.
The findings could add firewood to the heated debate over whether the dogged pursuit of reform through austerity is a wise way to control the ongoing crisis in Europe. While lower debt loads, economist agree, would fundamentally extinguish one of the main causes of the crisis in the long run, the side effect of getting there -- high unemployment -- is making the situation much worse right now.
Manasse said the finding suggests there is a much larger role for [reducing] unemployment and [promoting] growth within the crisis.
More emphasis should be placed upon the employment and growth so that fiscal consolidation does not backlash by plunging the economy into recession, the paper states.
Of more academic than policy interest, the paper also found that downgrades by credit rating agencies were a huge factor in provoking the deterioration of investor confidence in a country and spreading contagion there, a fact many economists have discounted in the past. More than 27 percent of the idiosyncratic movement in CDS spreads could be isolated as being caused by major rating actions, the study found.
Manasse conceded that was a tough finding to square with the way economists currently view the effects of ratings downgrades.
All of the available literature -- which is from normal times -- suggests there is little effect. This is from the conventional view that ratings agencies are always late. But it's different this time, he said. One plausible explanation is that downgrading acts like a device to focus expectations in a highly psychological environment.