Marketâ€ based estimates of implicit government guarantees in European financial institutions
European Financial Management, 2018, vol. 24, issue 1, 79-112
I exploit the price differential of credit default swap (CDS) contracts written on debts with different levels of seniority to measure the implicit government guarantees enjoyed by European financial institutions from 2005 to 2013. I determine that the aggregate guarantee increased substantially during the recent financial crises and peaked at an average of 89â€‰bps in 2011. My analysis suggests that the extent of implicit support depends on the type of financial institutions and there exists a eurozone effect. Further investigation of feedback relationship shows that the guarantee implicitly offered by a government positively â€˜Granger causesâ€™ the sovereign's default risk.
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