The credit channel of the sovereign spread: A Bayesian SVAR analysis

Gianluca Cafiso, Alessandro Missale and Giulia Rivolta

Economic Modelling, 2025, vol. 144, issue C

Abstract: Sovereign bond spread shocks are thought to threaten debt sustainability mainly through their impact on refinancing costs. Our analysis sheds light on a less evident channel, we call it the spread-credit channel. It originates from the negative impact of spread shocks on bank loans, which can trigger a “diabolic loop” between slowing economic activity, high debt, increasing spreads and banks’ vulnerability. Contrary to other studies in the literature, we identify the structural shocks to the Italian spread using a Proxy-SVAR model. The Bayesian estimation of the Proxy-SVAR shows that spread shocks negatively affect bank lending and economic activity making the debt-to-GDP ratio increase. Debt sustainability also depends on how investors react to shocks. We find evidence that foreigners disinvest, while domestic investors buy more debt when it becomes riskier.

Keywords: Sovereign bonds; Sovereign spread shocks; Bank lending; Public debt sustainability (search for similar items in EconPapers)
JEL-codes: E60 G21 H63 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:144:y:2025:i:c:s0264999324003419

DOI: 10.1016/j.econmod.2024.106984

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