The role of creditor seniority in Europe's sovereign debt crisis

What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk

Sven Steinkamp () and Frank Westermann

Economic Policy, 2014, vol. 29, issue 79, 495-552

Abstract: The share of public debt that is held by lenders with preferred creditor status (i.e. the IMF, ECB, ESM, etc.) has increased substantially during Europe's sovereign debt crisis. Empirically, we document in both macro and survey data that there exists a close relationship between the increase in senior tranche lending and the interest rates of countries in crisis. With regard to policy implications, we point out a predicament that policymakers are facing: while aiming to stabilize interest rates at a reasonable level, providing further senior loans might achieve just the opposite, as private markets are gradually pushed into a junior position.— Sven Steinkamp and Frank Westermann

Date: 2014
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