The EU Stress Test and Sovereign Debt Exposures

Adrian Blundell-Wignall and Patrick Slovik
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Adrian Blundell-Wignall: OECD

No 4, OECD Working Papers on Finance, Insurance and Private Pensions from OECD Publishing

Abstract: This working paper’s quantifications show that most sovereign debt is held on the banking books of banks, whereas the EU stress test considered only their small trading book exposures. It discusses why sovereign debt held in the banking book cannot be ignored by investors and creditors, because of: (a) recovery values in the event of individual bank failures; and (b) fiscal sustainability and structural competitiveness issues which mean the market cannot give a zero probability to debt restructurings beyond the period of the stress test and/or the period after which the role of the European Financial Stability Facility Special Purpose Vehicle (EFSF SPV) comes to an end. How the SPV could operate to shift sovereign risk from banks to the public sector is also an important part of the discussion.

Keywords: financial; stability (search for similar items in EconPapers)
JEL-codes: E62 G21 G28 (search for similar items in EconPapers)
Date: 2010-08-01
New Economics Papers: this item is included in nep-ban, nep-eec, nep-fmk and nep-mac
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Citations: View citations in EconPapers (53)

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