Banking and Sovereign Risk in the Euro Area

Stefan Gerlach (), Guntram Wolff and Alexander Schulz

No 7833, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the determinants of euro area sovereign bond spreads since the introduction of the euro. An aggregate risk factor is a main driver of spreads, both directly and indirectly by interacting with the size and structure of national banking sectors. When aggregate risk increases, countries with large banking sectors with low equity ratios experience greater widening in yield spreads, suggesting that financial markets perceive a larger risk that governments will have to rescue banks, increasing public debt and therefore sovereign risk. Moreover, government debt levels and forecasts of future fiscal deficits are also significant determinants of sovereign spreads.

Keywords: Banking; Emu; Liquidity; Sovereign bond markets (search for similar items in EconPapers)
JEL-codes: E43 E44 G12 (search for similar items in EconPapers)
Date: 2010-05
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Citations: View citations in EconPapers (218)

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Working Paper: Banking and sovereign risk in the euro area (2010)
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