An anatomy of credit risk transfer between sovereign and financials in the Eurozone crisis

Anurag Banerjee (a.n.banerjee@durham.ac.uk), Chi-Hsiou Hung (chi-hsiou.hung@glasgow.ac.uk) and Kai Lisa Lo

Journal of International Financial Markets, Institutions and Money, 2016, vol. 41, issue C, 102-120

Abstract: In this paper we assess the effectiveness of large scale bailouts aiming at preventing a financial crisis from further propagating into a systemic risk. We examine the structural changes in the relationship between the sovereign and financial institutions’ credit default swap spreads during the European sovereign debt crisis. Before the first Greek bailout by the European Financial Stability Facility (EFSF), the sovereign and financial sectors exhibit a two-way feedback effect for both the short and the long runs. Crucially, we find that after the first Greek bailout, shocks in the financial sector either exert significantly negative impacts or lose influences on the sovereign sector. In contrast, all the later bailouts by the EFSF (the second Greek bailout, Irish and Portugal bailouts) do not show this pattern change in the two-way risk transfer relationship.

Keywords: Eurozone crisis; Credit default risk; Credit default swap spread; Sovereign debt; Financial institutions; European Financial Stability Facility; Bailout (search for similar items in EconPapers)
JEL-codes: F3 G1 G2 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:41:y:2016:i:c:p:102-120

DOI: 10.1016/j.intfin.2015.12.007

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