Euro Area Sovereign Risk During the Crisis

By Silvia Sgherri, Edda Zoli. Social Science Research Network, 2009

270 citations recorded by the source corpus.

While the use of public resources is critical to cushion the impact of the financial crisis on the euro-area economy, it is key that the entailed fiscal costs not be seen by markets as undermining fiscal sustainability. From this perspective, to what extent do movements in euro area sovereign spreads reflect country-specific solvency concerns? In line with previous studies, the paper suggests that euro area sovereign risk premium differentials tend to comove over time and are mainly driven by a common time-varying factor, mimicking global risk repricing. Since October 2008, however, there is evidence that markets have become progressively more concerned about the potential fiscal implications of national financial sectors' frailty and future debt dynamics. The liquidity of sovereign bond markets still seems to play a significant (albeit fairly limited) role in explaining changes in euro area spreads.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/8ce8363f57408903014763135019e22ffa56f942

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Citations in the corpus

The impact of sovereign credit risk on bank funding conditions (2011, unknown): “43 For empirical analysis of the crisis period, see IMF (2010), Sgherri and Zoli (2009) and Aretzky et al (2011).”
Modelling and forecasting government bond spreads in the euro area: A GVAR model (2013, background): “Sgherri and Zoli(2009) also argue that since 2008 local fiscal fundamentals have gained strength in explaining the deviation of spreads from a common time-varying factor.”
Systemic Risk, Sovereign Yields and Bank Exposures in the Euro Crisis (2014, background): “…risk aversion by the spread between the US AAA corporate bonds and the US 10-year sovereign bonds, Caceres et al. (2010) estimate it as the market price of risk of a stress event, and Sgherri and Zoli (2009) measure it as a latent common factor in spreads by estimating a first-stage regression.”
Sovereign bond yield spreads and sustainability: An empirical analysis of OECD countries (2019, background): “…two variables: total public debt and primary balance, both in relation to GDP. Countries with higher levels of debt and/or larger fiscal deficits would be considered less creditworthy and this would thus amplify default risk (Attinasi et al., 2009; Sgherri and Zoli, 2009; Gruber and Kamin, 2012).”
Sovereign Spreads: Global Risk Aversion, Contagion or Fundamentals? (2010, unknown): “Sgherri and Zoli (2009) apply a Bayesian filtering technique to extract the time-varying common factor from a non-linear model of the sovereign spreads.”
The Determinants of Sovereign Bond Yield Spreads in the EMU (2012, background): “The utilisation of expected, as opposed to historical fiscal data, is in line with a number of recent studies on EMU government bond yield spreads including Attinasi et al. (2009), Sgherri and Zoli (2009), Gerlach et al. (2010) and Favero and Missale (2011).”
PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies (2011, background): “More recent papers suggest this relation also holds in the face of the current economic crisis, see for example Attinasi et al. (2009) or Sgherri and Zoli (2009) .”
A Pyrrhic Victory? - Bank Bailouts and Sovereign Credit Risk (2011, unknown): “Sgherri and Zoli (2009), Attinasi, Checherita and Nickel (2009) and Ejsing and Lemke (2011) focus on the effect of bank bailout announcements on sovereign credit risk measured using CDS spreads.”