From 2009 onwards, the contagion effects to Italy increase to more than 20 percent according to this model. In the third model a country’s government bond spread vis-à-vis Germany is regressed on a measure of risk aversion, a measure of own sovereign solvency risk, the country’s credit rating and the spillover effect from Greece, captured by the credit ratings on the Greek sovereign debt.
The projected gradual recovery in 2010 reflects the effects of the substantial macroeconomic stimulus under way as well as of the extensive policy measures that have been introduced to restore the functioning of the financial system, both inside and outside the euro area. In addition, the fall in commodity prices is expected to support real disposable income and consumption in the period ahead.