Sovereign risk dynamics in the EU: the time varying relevance of fiscal and external (im)balances
Antonio Afonso,
José Alves and
Sofia Monteiro
No 2024/0311, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa
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: 2024-02
New Economics Papers: this item is included in nep-eec and nep-opm
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Citations: View citations in EconPapers (2)
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Related works:
Journal Article: Sovereign risk dynamics in the EU: The time varying relevance of fiscal and external (im)balances* (2024) 
Working Paper: Sovereign Risk Dynamics in the EU: The Time Varying Relevance of Fiscal and External (Im)balances (2024) 
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Persistent link: https://EconPapers.repec.org/RePEc:ise:remwps:wp03112024
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