## wp17162

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---

### Introduction and overview
- Objective: assess whether euro area membership conferred a tangible “privilege” (a perception premium) that lowered perceived country risk and funding costs relative to non-members.
- Framing questions:
  - Did euro area economies benefit from a “privilege” prior to the euro area crisis?
  - Did the privilege survive the crisis?
  - How has it fared during the recovery?
- Time span and sample context:
  - The paper estimates a premium for each of the past 15 years.
  - Annual data for 2001–2016 for 34 European economies.
  - Accession/adoption timing notes: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia joined the EU in 2004; Bulgaria and Romania in 2007; Croatia in 2013. Slovenia (2007), Cyprus (2008), Malta (2008), Slovakia (2009), Estonia (2011), Latvia (2014) and Lithuania (2015) adopted the euro.

### Empirical approach
- Outcome variable:
  - Country risk perception measured with the International Investor Country Credit Rating (IIR) index (scale 0–100, 100 = least likelihood of default; responses weighed by institutional exposure).
  - Transformation yields a Logistic Investor Rating Index (LIIR); transformation is broadly linear for IIR index values between 15 and 85 (range comprises about two-thirds of the sample).
  - For comparison, a linearized Standard & Poors (S&P) sovereign credit rating is also used, converted to numerical values from 1 (C) to 17 (AAA); 4½ points on the IIR scale correspond to one rating notch with S&P.
- Core empirical specification:
  - Linear dynamic equation with lagged dependent variable, country fixed effects, time dummies, and vector X of macroeconomic and institutional fundamentals.
  - Euro area membership parameter γ_t captures the annual value investors assign to membership beyond fundamentals; γ_t is estimated separately for each year.
  - EU membership parameter λ_t is estimated analogously.
  - Estimation method: Arellano-Bond (1991) GMM estimator to address correlation between lagged dependent variable and country fixed effects.
- Fundamentals and controls (X):
  - Fiscal and external balances, public debt, per-capita-GDP, real GDP growth, unemployment rate, inflation, investment ratio, net international investment position (NIIP).
  - All flow variables instrumented with past values; NIIP and euroization also instrumented.
  - Two interaction variables with euro membership: (i) dummy for whether a country’s currency is floating (euro area membership sets this dummy to zero), and (ii) euroization dummy (value 1 if share of FX loans or deposits exceeded one-third).
  - Public debt data coverage: available for about 94 percent of observations; a “missing observations” dummy included for the remaining 6 percent.

### Results — Macroeconomic fundamentals (highlights)
- Perceptions dynamics:
  - Lagged perception coefficients (autoregressive component) are large and statistically significant, indicating strong perceptions stickiness.
  - Reported lagged perception coefficients and t-values from Table 1:
    - 0.671 (t-value 8.84)
    - 0.601 (t-value 9.00)
    - 0.701 (t-value 15.06)
    - 0.571 (t-value 16.48)
- Significant fundamentals affecting investor perception (reported significance across specifications):
  - Real growth: coefficient examples 0.15 (t-value 4.94), 0.07 (t-value 2.80), 0.09 (t-value 4.41), 0.07 (t-value 2.84).
  - Unemployment rate: negative impact examples -0.06 (t-value -2.47), -0.06 (t-value -3.21), -0.09 (t-value -3.41), -0.06 (t-value -2.54).
  - General government balance: positive examples 0.04 (t-value 2.49), 0.05 (t-value 3.88), 0.06 (t-value 4.46).
  - General government debt: negative examples -0.01 (t-value -2.38), -0.01 (t-value -3.14), -0.01 (t-value -3.20).
  - NIIP: positive in some specifications examples 0.003 (t-value 3.35), 0.002 (t-value 2.67).
  - Financial euroization: S&P ratings place a significant negative premium equivalent to about one-quarter of a rating point (S&P specification).
- Instrumentation and estimation diagnostics:
  - Observations: 476.
  - Arellano-Bond tests for first-differenced errors:
    - Order 1 reported statistics: -4.138 (0.000), -3.610 (0.000), -2.910 (0.004), -3.335 (0.001).
    - Order 2 reported statistics: -0.673 (0.501), -0.119 (0.906), -0.199 (0.842), -0.399 (0.690).

### Results — Privilege (euro area membership premium)
- Main pattern:
  - Pre-crisis (prior to the euro crisis) euro area membership carried a perception bonus equivalent to about one S&P rating notch (per IIR and LIIR-based regressions).
  - The euro crisis triggered a sharp reassessment that made the premium disappear in 2010.
  - The euro area membership premium recovered gradually in subsequent years and returned to positive significance in 2015, although at only about half its pre-crisis size.
  - Over the entire observation period, the relative decline in the euro premium is somewhat larger with the LIIR index than with the IIR index (investors marked down the value of euro area membership more for highly rated relative to less highly rated countries).
- Comparison with EU membership premium:
  - EU membership point estimates are positive but typically insignificant, fluctuating between 0 and 0.6.
  - Wald/χ2 tests:
    - Equality of annual EU premia for 2002–16: χ2(14) = 14.02 (0.4479) — fail to reject equality.
    - Equality of annual euro area membership premia: χ2(14) = 76.60 (0.000) — strongly reject equality.
  - A time-invariant estimate for the EU premium: 0.38 (t-value 3.05).

### Standard and Poors Rating, Euro Area — Membership premium estimates (S&P ratings)
- Main findings:
  - In general, the estimates show no positive statistically significant premium for euro area membership.
  - Exception: only 2009 (the year right before the euro area crisis) shows a positive statistically significant premium.
  - After the euro area crisis, S&P downgraded the value of membership for three consecutive years—in 2010, 11, and 12—while investors did so only once, in 2010.
  - By 2012/13, S&P assigned a statistically significant negative premium to membership of about one rating point.
  - The subsequent recovery brought the S&P premium back to neutral territory, but not to positive significance (in contrast to investor perceptions).
- Additional notes:
  - Ratings uncertainty was exceptionally high during the euro area crisis, with a doubling of the confidence band around the point estimate of the S&P premium.
  - The negative turning point for the S&P premium coincides with ECB President Draghi’s “whatever it takes” speech in 2012, while the turning point for investors was already two years earlier.
  - A closer inspection suggests the 2009 premium largely reflects rating action in the control group (sharp downgrades of non-euro area countries: the Baltics, Hungary and Ukraine) during the first phase of the global financial crisis.

### Robustness checks performed
- Modifications included:
  - (i) scaling public debt and the general government balance with tax revenue instead of GDP,
  - (ii) longer autoregressive lags for investor perception, and lags for macroeconomic fundamentals,
  - (iii) treating more covariates as endogenous, including the euro area membership time dummies,
  - (iv) using the Blundell-Bond (1998) GMM estimator instead of Arellano-Bond,
  - (v) limiting the number of instruments in the level equation, and
  - (vi) using fixed effects estimators instead of GMM.
- Outcome:
  - No robustness check changes the broad patterns identified in Table 1 and Figure 2.
  - Fixed effects and GMM estimates of (1) are remarkably similar.

### Control for institutional quality
- Concern:
  - Strong institutions may facilitate euro area (and/or the EU) membership; selection bias could affect results if not captured by fundamentals.
- Approach:
  - Regression that adds the Kaufmann et al. (2006) governance quality index as covariate (index exists only until 2015; no estimate for 2016).
- Findings:
  - Institutional quality by itself has a strong impact on investor perceptions.
  - Inclusion of the governance quality index does little to change parameter estimates for other covariates—impact mostly picked up by country fixed effects.
  - Evolution of euro area privilege remains practically unchanged:
    - On average, the point estimate for the value of euro area membership is marked down by less than 0.1 points.
    - The point estimate for EU membership (not displayed) is marked down by exactly 0.1 points.
    - Both adjustments are well within the margin of error.

### Time-varying coefficients: specification and tests
- Motivation:
  - Specification (1) assumes investors’ assessment of factors other than euro (and EU) membership is time invariant; this may not hold during crisis periods.
- Expanded model:
  - Model expanded in the spirit of Beirne and Fratzscher (2013) to allow parameters for some or all macro-fundamentals to vary with time.
  - Equation (3) introduces period dummies for three periods: pre-crisis 2002-09, crisis 2010-12, and recovery 2013-16.
- Estimation strategy:
  - First estimate allowing all parameters measuring impact of macro-fundamentals to differ across time periods.
  - Then test parameter equality across periods using Wald-tests; where equality is not rejected at the 90 percent level, include a time-invariant parameter in the final specification.
- Selected outputs (Table 2):
  - Lagged perception 0.541 2.54***
  - Gen. gov. balance 0.07 4.72***
  - Euroization -0.15 -1.23
  - Floating 0.07 0.43
  - Observations 476
  - Wald tests for parameter equality χ2 (2):
    - Real growth 23.05 (0.000)
    - Unemployment rate 8.59 (0.014)
    - General government debt 20.67 (0.000)
    - External balance 13.83 (0.001)
    - NIIP 21.54 (0.000)
  - Arellano-Bond test for autocorrelation in first-differenced errors -3.495 (0.001) and 0.371 (0.710)
  - Significance at the 1 (***), 5 (**), and 10 (*) percent level.
- Interpretation of Wald-tests:
  - Time invariance is reasonable for: general government balance, inflation, national investment, the euroization dummy, and the fixed exchange rate regime dummy.
  - Of those, only the general government balance is estimated to have statistically significant impact on perceptions.
  - For other macro-fundamentals, Wald-tests reject time invariance; period-specific parameters are estimated.

### Time-varying results and interpretation
- Euro premium (Figure 4.1):
  - Pre-crisis and recovery: time-varying and time-invariant models produce near-identical estimates of the euro premium.
  - Crisis period: premium’s decline is less dramatic with the time-varying model—consistent with investors re-evaluating both euro area membership and fundamentals.
  - Difference between models within margin of error; basic pattern persists: shift from positive significance until 2009 to insignificance in 2010, followed by a return to significance during the recovery at a reduced size.
- Macro-fundamentals:
  - Public debt (Figure 4.2) had a negative impact throughout; impact more than tripled in crisis.
  - Current account balance (Figure 4.3) and real GDP growth (Figure 4.4) became significant influences on country perception only once the crisis erupted.
  - Crisis induced investors to weigh fiscal risks, external risks, and growth capacity more heavily; these shifts persisted during the recovery.
- Other changes:
  - Impact of the unemployment rate on country perceptions weakened during the recovery, though it remained strongly negative.
  - NIIP (Figure 4.6)—a borderline positive influence before the crisis and during recovery—lost temporary significance in crisis.
- Robustness to period definitions:
  - Variations treating 2009 as first crisis year or letting recovery start in 2014 trigger minor changes in euro premium path but preserve basic pattern and have no substantive impact on other results.

### Key synthesis: drivers of deterioration and recovery
- Two distinct factors drove deterioration in euro area country risk assessments during the crisis:
  - Investors downgraded the value of euro area membership.
  - Investors started paying more attention to risks concentrated among euro area members, like high public debt and large external deficits.
- Dynamics:
  - The first factor (downgrading of membership value) reverted as the recovery took hold, at least in part.
  - The second factor (greater attention to fiscal and external vulnerabilities) has remained in place.

### Summary and conclusions
- Main conclusion:
  - After taking a severe hit during the crisis, the euro’s reputation has begun to recover. As of end-2016, investors saw euro area membership again as a bonus, even though the associated premium is only half the size it was before the euro crisis.
- Limitations:
  - The empirical approach does not identify causes for the revival (institutional reforms, resilience of the currency union, impact of economic recovery on perceptions).
  - Distinguishing between these causes is suggested as a topic for future investigation.
- Robustness:
  - The finding of a resurging euro premium is robust to a wide range of specifications.
- Lessons on fundamentals:
  - Importance of public debt, current account balance, and capacity to generate growth increased greatly once the crisis erupted.
  - These shifts have persisted throughout the recovery; investors appear to have learned the lesson, offering grounds for optimism that the mispricing of country risk in the run-up to the euro crisis may not repeat.

*Source: wp17162 - References, IMF working paper content (excerpts provided).*

### References................................................................................................18

### References

### Introduction and overview
- Objective: assess whether euro area membership conferred a tangible “privilege” (a perception premium) that lowered perceived country risk and funding costs relative to non-members.
- Framing questions:
  - Did euro area economies benefit from a “privilege” prior to the euro area crisis?
  - Did the privilege survive the crisis?
  - How has it fared during the recovery?
- Time span and sample context:
  - The paper estimates a premium for each of the past 15 years.
  - Annual data for 2001–2016 for 34 European economies.
  - Note on accession/adoption timing: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia joined the EU in 2004; Bulgaria and Romania in 2007; Croatia in 2013. Slovenia (2007), Cyprus (2008), Malta (2008), Slovakia (2009), Estonia (2011), Latvia (2014) and Lithuania (2015) adopted the euro.

### Empirical approach
- Outcome variable:
  - Country risk perception measured with the International Investor Country Credit Rating (IIR) index (scale 0–100, 100 = least likelihood of default; responses weighed by institutional exposure).
  - Transformation (equation (2)) yields a Logistic Investor Rating Index (LIIR); (2) is broadly linear for IIR index values between 15 and 85, a range that comprises about two-thirds of the sample.
  - For comparison, a linearized Standard & Poors (S&P) sovereign credit rating is also used, converted to numerical values from 1 (C) to 17 (AAA); 4½ points on the IIR scale correspond to one rating notch with S&P.
- Core empirical specification:
  - A linear dynamic equation with lagged dependent variable, country fixed effects, time dummies, and vector X of macroeconomic and institutional fundamentals.
  - Euro area membership parameter γ_t captures the annual value investors assign to membership beyond fundamentals; γ_t is estimated separately for each year.
  - EU membership parameter λ_t is estimated analogously.
  - Estimation method: Arellano-Bond (1991) GMM estimator to address correlation between lagged dependent variable and country fixed effects.
- Fundamentals and controls (X):
  - Fiscal and external balances, public debt, per-capita-GDP, real GDP growth, unemployment rate, inflation, investment ratio, net international investment position (NIIP).
  - All flow variables instrumented with past values; NIIP and euroization also instrumented.
  - Two interaction variables with euro membership: (i) dummy for whether a country’s currency is floating (euro area membership sets this dummy to zero), and (ii) euroization dummy (value 1 if share of FX loans or deposits exceeded one-third).
  - Public debt data coverage: available for about 94 percent of observations; a “missing observations” dummy included for the remaining 6 percent.

### Results — Macroeconomic fundamentals (highlights)
- Perceptions dynamics:
  - Lagged perception coefficients (autoregressive component) are large and statistically significant, indicating strong perceptions stickiness.
  - Reported lagged perception coefficients and t-values from Table 1:
    - 0.671 (t-value 8.84)
    - 0.601 (t-value 9.00)
    - 0.701 (t-value 15.06)
    - 0.571 (t-value 16.48)
- Significant fundamentals affecting investor perception (reported significance across specifications):
  - Real growth: coefficient examples 0.15 (t-value 4.94), 0.07 (t-value 2.80), 0.09 (t-value 4.41), 0.07 (t-value 2.84).
  - Unemployment rate: negative impact (example -0.06, t-value -2.47; -0.06, t-value -3.21; -0.09, t-value -3.41; -0.06, t-value -2.54).
  - General government balance: positive (example 0.04, t-value 2.49; 0.05, t-value 3.88; 0.06, t-value 4.46).
  - General government debt: negative (example -0.01, t-value -2.38; -0.01, t-value -3.14; -0.01, t-value -3.20).
  - NIIP: positive in some specifications (example 0.003, t-value 3.35; 0.002, t-value 2.67).
  - Financial euroization: S&P ratings place a significant negative premium equivalent to about one-quarter of a rating point (S&P specification).
- Instrumentation and estimation diagnostics:
  - Observations: 476 (reported).
  - Arellano-Bond tests for first-differenced errors:
    - Order 1 reported statistics: -4.138 (0.000), -3.610 (0.000), -2.910 (0.004), -3.335 (0.001).
    - Order 2 reported statistics: -0.673 (0.501), -0.119 (0.906), -0.199 (0.842), -0.399 (0.690).

### Results — Privilege (euro area membership premium)
- Main pattern:
  - Pre-crisis (prior to the euro crisis) euro area membership carried a perception bonus equivalent to about one S&P rating notch (per IIR and LIIR-based regressions).
  - The euro crisis triggered a sharp reassessment that made the premium disappear in 2010.
  - The euro area membership premium recovered gradually in subsequent years and returned to positive significance in 2015, although at only about half its pre-crisis size.
  - Over the entire observation period, the relative decline in the euro premium is somewhat larger with the LIIR index than with the IIR index (investors marked down the value of euro area membership more for highly rated relative to less highly rated countries).
- Comparison with EU membership premium:
  - EU membership point estimates are positive but typically insignificant, fluctuating between 0 and 0.6.
  - Wald/χ2 tests:
    - Equality of annual EU premia for 2002–16: χ2(14) = 14.02 (0.4479) — fail to reject equality.
    - Equality of annual euro area membership premia: χ2(14) = 76.60 (0.000) — strongly reject equality.
  - A time-invariant estimate for the EU premium: 0.38 (t-value 3.05).

### Interpretation and limitations
- Conceptual:
  - “Privilege” defined as investors marking down risks for euro area members beyond what macroeconomic or institutional characteristics explain.
  - The approach is reduced-form: it identifies the existence and timing of a perception premium (or its disappearance) but does not explicitly tie the premium to specific transmission channels or quantify potential financial consequences of a “perceptions premium.”
- Measurement choices and caveats:
  - IIR index numerical constraints motivate logistic transformation to LIIR to avoid insensitivity near index bounds.
  - One-third of observations have IIR values higher than 85 and are re-weighted by the LIIR transformation; these correspond broadly to countries rated AAA or AA+ with S&P.
  - Some covariates (e.g., euroization, NIIP) may be affected by investor sentiment; these are instrumented.
  - The “floating” dummy and euroization dummy are defined by IMF de facto classification and multiple data sources (EBRD, central banks); euro adoption sets floating dummy to zero and largely eliminates euroization.
- Data and estimation period constraints driven mostly by data availability.

*Source: wp17162 - References, IMF working paper content (excerpts provided).*

### 4.  Standard and Poors Rating, Euro Area

### 4.  Standard and Poors Rating, Euro Area

### Membership premium estimates (S&P ratings)
- Figure 2.4 displays estimates for euro area membership premia extracted from the S&P credit ratings.
- Main findings:
  - In general, the estimates show no positive statistically significant premium for euro area membership.
  - An exception is only 2009, i.e. the year right before the euro area crisis.
  - After the euro area crisis, S&P downgraded the value of membership for three consecutive years—in 2010, 11, and 12—while investors did so only once, in 2010.
  - By 2012/13, S&P assigned a statistically significant negative premium to membership of about one rating point.
  - The subsequent recovery brought the S&P premium back to neutral territory, but not to positive significance (in contrast to investor perceptions).
- Additional notes:
  - Ratings uncertainty was exceptionally high during the euro area crisis, with a doubling of the confidence band around the point estimate of the S&P premium.
  - The negative turning point for the S&P premium coincides with ECB President Draghi’s “whatever it takes” speech in 2012, while the turning point for investors was already two years earlier.
  - A closer inspection suggests the 2009 premium largely reflects rating action in the control group (sharp downgrades of non-euro area countries: the Baltics, Hungary and Ukraine) during the first phase of the global financial crisis.

### Robustness checks performed
- Modifications performed to check robustness included:
  - (i) scaling public debt and the general government balance with tax revenue instead of GDP, thus using the “fiscal space” variables proposed in Aizenman et al. (2013),
  - (ii) longer autoregressive lags for investor perception, and lags for macroeconomic fundamentals,
  - (iii) treating more covariates as endogenous, including the euro area membership time dummies (to correct for possible omitted variable bias),
  - (iv) using the Blundell-Bond (1998) GMM estimator instead of Arellano-Bond,
  - (v) limiting the number of instruments in the level equation to prevent over-fitting of endogenous variables, and
  - (vi) using fixed effects estimators instead of GMM.
- Outcome:
  - No robustness check changes the broad patterns identified in Table 1 and Figure 2.
  - Fixed effects and GMM estimates of (1) are remarkably similar. This may be because N exceeds T by less (34 vs. 15) than in many other applications, limiting the advantage of GMM estimators in terms of reducing asymptotic bias.

### Control for institutional quality
- Concern:
  - Strong institutions may facilitate euro area (and/or the EU) membership. If differences in institutional quality between members and non-members go beyond what is reflected in macroeconomic fundamentals, selection bias could affect results.
- Approach:
  - Table 1 column (4) and Figure 3 show estimates from a regression that adds the Kaufmann et al. (2006) governance quality index as covariate.
  - Drawback: the index exists only until 2015, hence no estimate for 2016 can be reported.
- Findings:
  - Institutional quality by itself has a strong impact on investor perceptions.
  - Inclusion of the governance quality index does little to change parameter estimates for the other covariates—suggesting its impact was mostly picked up by the country fixed effects in the basic specification.
  - Evolution of euro area privilege remains practically unchanged:
    - On average, the point estimate for the value of euro area membership is marked down by less than 0.1 points.
    - The point estimate for EU membership (not displayed) is marked down by exactly 0.1 points.
    - Both adjustments are well within the margin of error.

### Time-varying coefficients: specification and tests
- Motivation:
  - Specification (1) assumes investors’ assessment of factors other than euro (and EU) membership is time invariant. This may not hold during crisis periods.
- Expanded model:
  - The model is expanded in the spirit of Beirne and Fratzscher (2013) to allow parameters for some or all macro-fundamentals to vary with time.
  - Equation (3) introduces period dummies. Three periods distinguished: pre-crisis period 2002-09, crisis period 2010-12, and recovery period 2013-16.
- Estimation strategy:
  - First, estimate allowing all parameters measuring impact of macro-fundamentals to differ across time periods.
  - Then test parameter equality across periods using Wald-tests; where equality is not rejected at the 90 percent level, include a time-invariant parameter in the final specification.
- Table 2 (Time-Varying Coefficients) selected outputs (as reported):
  - Coeff.t-value
  - Controls
    - Lagged perception 0.541 2.54***
    - Per- capi ta GDP- 2.71^( - 6)- 0.51
    - Real growth
    - Inve stme nt/GDP0.010.45
    - Unemployment rate
    - CPI i nf l ati on- 0.01- 1.16
    - Gen. gov. balance0.074.72***
    - Gen. government debt
    - External balance
    - NIIP
    - Euroi zati on- 0.15- 1.23
    - Fl oati ng0.070.43
    - Euro area membership
  - Observations476
  - Wald tests for parameter equality χ2 ( 2)
    - Real growth 23.05 ( 0.000)
    - Unemployment rate 8.59 ( 0.014)
    - General government debt 20.67 ( 0.000)
    - External balance 13.83 ( 0.001)
    - NIIP 21.54 ( 0.000)
  - Arrelano-Bond test for autocorrelation in first-differenced errors - 3.495 ( 0.001) and 0.371  ( 0.710)
  - Significance at the 1 (***), 5 (**), and 10 (*) percent level.
- Interpretation of Wald-tests:
  - Time invariance is reasonable for: general government balance, inflation, national investment, the euroization dummy, and the fixed exchange rate regime dummy.
  - Of those, only the general government balance is estimated to have statistically significant impact on perceptions.
  - For other macro-fundamentals, Wald-tests reject time invariance; period-specific parameters are estimated.

### Time-varying results (Figure 4 and interpretation)
- Euro premium (Figure 4.1):
  - For the pre-crisis period and the recovery, the time-varying model and the time-invariant model produce near-identical estimates of the euro premium.
  - For the crisis period, the premium’s decline is less dramatic with the time-varying model—consistent with investors re-evaluating not only euro area membership but also fundamentals.
  - The difference between the two models is within the margin of error; basic pattern persists: shift from positive significance until 2009 to insignificance in 2010, followed by a return to significance during the recovery, although at a reduced size.
- Macro-fundamentals:
  - Public debt (Figure 4.2) had a negative impact on investor perceptions throughout; its impact more than tripled in crisis.
  - Current account balance (Figure 4.3) and real GDP growth (Figure 4.4) became significant influences on country perception only once the crisis erupted.
  - The euro crisis induced investors to weigh fiscal risks, external risks, and growth capacity more heavily.
  - These crisis-induced shifts persisted during the recovery: investors internalized the crisis’ lessons even after financial strains had subsided.
- Other changes:
  - Impact of the unemployment rate on country perceptions weakened during the recovery, although it remained a strongly negative factor.
  - Net international investment position (Figure 4.6)—a borderline positive influence on perceptions before the crisis and during the recovery—lost temporarily its significance for perceptions in crisis.
- Robustness to period definitions:
  - Results were checked by treating 2009 (instead of 2010) as the first crisis year, or by letting the recovery start in 2014 (instead of 2013).
  - Such variations trigger minor changes in the precise path of the euro premium but always preserve the basic pattern and have no substantive impact on other results.

### Key synthesis: drivers of deterioration and recovery
- The time-varying model identifies two distinct factors driving the deterioration in euro area country risk assessments during the crisis:
  - Investors downgraded the value of euro area membership.
  - Investors started paying more attention to risks concentrated among euro area members, like high public debt and large external deficits.
- Dynamics:
  - The first factor (downgrading of membership value) reverted as the recovery took hold, at least in part.
  - The second factor (greater attention to fiscal and external vulnerabilities) has remained in place.

### Summary and conclusions
- Main conclusion:
  - After taking a severe hit during the crisis, the euro’s reputation has begun to recover. As of end-2016, investors saw euro area membership again as a bonus, even though the associated premium is only half the size it was before the euro crisis.
- Limitations:
  - The empirical approach stops short of identifying causes for the revival (institutional reforms, resilience of the currency union, impact of economic recovery on perceptions).
  - Distinguishing between these causes is suggested as a worthwhile topic for future investigation.
- Robustness:
  - The finding of a resurging euro premium is robust to a wide range of specifications.
- Lessons on fundamentals:
  - Importance of public debt, current account balance, and capacity to generate growth increased greatly once the crisis erupted.
  - These shifts have persisted throughout the recovery; investors appear to have learned the lesson, offering grounds for optimism that the mispricing of country risk in the run-up to the euro crisis may not repeat.

*Source: wp17162 - 4.  Standard and Poors Rating, Euro Area*

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_Source: https://www.imf.org/-/media/files/publications/wp/2017/wp17162.pdf_