COVID-19: the stabilising impact of EU bond issuance on sovereigns and banks

Mario Bellia, Ludovic Calès, Lorenzo Frattarolo, Daniel Monteiro and Marco Petracco Giudic

Quarterly Report on the Euro Area (QREA), 2021, vol. 20, issue 3, 17-28

Abstract: This section explores the effects of the large-scale EU bond issuance and the ECB asset purchases in the context of a hypothetical financial crisis that would have been induced by the COVID-19 downturn. Stylised simulations show that the crisis response policies of the EU have strongly mitigated the risks associated with sovereign-bank loops in euro area countries. In particular, monetary policy action together with the introduction of a common debt instrument can more than halve potential losses to public finances from a hypothetical banking crisis. Moreover, these positive effects accrue to all Member States, even after accounting for costs linked to the extension of joint guarantees. The results also suggest that a recovery package offering a mix of both loans and grants to affected countries can be optimal for the euro area as a whole from the perspective of attenuating sovereign-bank loops.

Keywords: NGEU; sovereign debt; banking; financial crises; European safe asset; Euro area, COVID-19 pandemic, corona (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:euf:qreuro:0203-02

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