Banking and Sovereign Risk in the Euro Area

By Stefan Gerlach, Alexander Schulz, Guntram B. Wolff. Social Science Research Network, 2010

278 citations recorded by the source corpus.

We study the determinants of euro area sovereign bond spreads since the introduction of the euro. An aggregate risk factor is a main driver of spreads, both directly and indirectly by interacting with the size and structure of national banking sectors. When aggregate risk increases, countries with large banking sectors with low equity ratios experience greater widening in yield spreads, suggesting that financial markets perceive a larger risk that governments will have to rescue banks, increasing public debt and therefore sovereign risk. Moreover, government debt levels and forecasts of future fiscal deficits are also significant determinants of sovereign spreads.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/64616823c5fd3e81e5af873958d880f8e89c192a

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Citations in the corpus

The Euro and the Geography of International Debt Flows (2014, background): “15Econometric analyses of the pre-crisis convergence of euro area sovereign yields include Ehrmann et al. (2011) and Gerlach et al. (2010).”
Sovereign bond yield spreads: A time-varying coefficient approach (2012, background): “Hallerberg and Wolff (2008), Bernoth et al. (2006), and Gerlach et al. (2010) find that interest differentials among EU countries vary depending upon the debt and deficit level of the issuing country.”
Sovereign bond yield spreads and sustainability: An empirical analysis of OECD countries (2019, background): “include lagged sovereign bond spreads to account for the persistence inherent to spreads (Hallerberg and Wolff, 2008; Gerlach et al., 2010; Afonso et al., 2012).”
The Determinants of Sovereign Bond Yield Spreads in the EMU (2012, methodology): “…Bond GMM method, is more appropriate to cases where the panel is characterised by a large number of cross-sections and a small number of time- standard practice in the empirical literature on EMU Equation(1) includes lagged spreads to account for spreads persistence (see also Gerlach et al., 2010).”
The EMU sovereign-debt crisis: Fundamentals, expectations and contagion (2012, background): “…the role of domestic banking sectors is crucial, with the financial system transforming global risk into sovereign risk through two channels (see Gerlach et al., 2010): First, in periods of financial distress the government might be obliged to recapitalise banks using public money, thus…”
Self-Fulfilling Crises in the Eurozone: An Empirical Test (2012, background): “…effect on economic activity, inducing a decline in government revenues and an increase in 6 Attinasi et al. (2009), Arghyrou & Kontonikas (2010), Gerlach et al. (2010), Schuknecht et al. (2010), Caceres et al. (2010), Caporale & Girardi (2011), Gibson et al. (2011), Aizenman & Hutchinson (2012)…”
Credit Spread Interdependencies of European States and Banks During the Financial Crisis (2012, unknown): “For instance Gerlach et al. (2010) find that as a consequence of macroeconomic imbalances, especially for peripheral European countries (e.g. Greece, Ireland), a jump in bond and credit default swap (CDS) spreads for sovereigns is further transmitted to the banking sector.”
Mispricing of Sovereign Risk and Macroeconomic Stability in the Eurozone (2012, background): “…a burgeoning literature has developed analyzing the determinants of the spreads in the eurozone (Attinasi et al., 2009; Arghyrou and Kontonikas, 2010; Gerlach et al., 2010; Schuknecht et al., 2011; Caceres et al., 2010; Caporale and Girardi, 2011; Gibson et al., 2011).1 One of the novel features…”
Rules and risk in the Euro area (2014, background): “The regression reveals that countries with larger banking sectors typically see larger spreads, con rming the ndings of Gerlach et al. (2010).”
The Greek financial crisis: growing imbalances and sovereign spreads (2012, methodology): “…on the determinants of spreads uses panel cointegration techniques on high frequency data where spreads are hypothesised to be driven by various financial market variables representing credit, liquidity and market risks (Dotz and Fischer, 2010; Fontana and Scheicher, 2010; Gerlach et al, 2010).”