EconPapers    
Economics at your fingertips  
 

Sovereign Risk Dynamics in the EU: The Time Varying Relevance of Fiscal and External (Im)balances

Antonio Afonso, José Alves and Sofia Monteiro

No 10979, CESifo Working Paper Series from CESifo

Abstract: Acknowledging the potential detrimental impact that twin-deficits may have on sovereign risk, this study uses a two-step approach to assess the impact of fiscal and external sustainability on sovereign risk dynamics for a panel of 27 European Economies between 2001Q4 and 2022Q3. To do so, we first estimate a country-specific time-varying measure of fiscal sustainability, through the cointegration between government revenues and expenditures, and of external sustainability, derived from the exports-imports cointegration. We then resort to those time-varying coefficients to assess their impact on sovereign risk, proxied by 10-year CDS and CDS spreads (against the US) making use of Weighted Least Squares (WLS) analysis. Noticeably, we show that an improvement of both fiscal and external sustainability lead to a reduction in sovereign risk. This phenomenon becomes notably pronounced, particularly when examining countries experiencing an upward trajectory in their public debt levels.

Keywords: sovereign risk; fiscal sustainability; external sustainability; CDS; CDS spreads (search for similar items in EconPapers)
JEL-codes: C23 F45 G23 G32 H63 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-eec and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp10979.pdf (application/pdf)

Related works:
Journal Article: Sovereign risk dynamics in the EU: The time varying relevance of fiscal and external (im)balances* (2024) Downloads
Working Paper: Sovereign risk dynamics in the EU: the time varying relevance of fiscal and external (im)balances (2024) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10979

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().

 
Page updated 2025-03-22
Handle: RePEc:ces:ceswps:_10979