As countries entered the European Monetary Union (EMU) in 1999, exchange rate risks were eliminated and yield spread among eurozone countries converged significantly. The theory of interest rate parity suggests yield spreads between comparable bonds should have vanished yet investors did not regard government bonds of different EMU countries as complete substitutes. Thus, spread remained and began to diverge significantly following the collapse of Lehman Brothers and the onset of the worst financial crisis in recent times. The EMU nation default or the potential break-up of the eurozone became more conceivable.
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