The Eurozone Crisis: How Banks and Sovereigns Came to Be Joined at the Hip

By A. Mody, D. Sandri. Social Science Research Network, 2011

240 citations recorded by the source corpus.

We use the rise and dispersion of sovereign spreads to tell the story of the emergence and escalation of financial tensions within the eurozone. This process evolved through three stages. Following the onset of the Subprime crisis in July 2007, spreads rose but mainly due to common global factors. The rescue of Bear Stearns in March 2008 marked the start of a distinctively European banking crisis. During this key phase, sovereign spreads tended to rise with the growing demand for support by weakening domestic financial sectors, especially in countries with lower growth prospects and higher debt burdens. As the constraint of continued fiscal commitments became clearer, and coinciding with the nationalization of Anglo Irish in January 2009, the separation between the sovereign and the financial sector disappeared.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/c9c351ca4ce8b7252b45a0ed26a7c89e6b6c5ede

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Citations in the corpus

Systemic Banking Crises Database II (2013, unknown): “…to the information contained in our database, we refer the reader to the following studies and reports for further details on each crisis: Bakker and Klingen (2012) and Åslund (2009) for Ukraine; and Lane (2012), Shambaugh (2012), Mody and Sandri (2012), and Obstfeld (2013) for the European crisis.”
Are Correlations Constant? Empirical and Theoretical Results on Popular Correlation Models in Finance (2017, unknown): “In the following years, an increasing spread between German and Italian government yields coincided with strong growth in S&P 500 stocks which caused a positive shift in the correlation between both assets (Mody and Sandri, 2012).”
The Portuguese Slump and Crash and the Euro Crisis (2013, unknown): “As a result of these features, sovereigns and banks in Europe are joined at the hip: the correlation between credit default swap spreads for sovereigns and banks is close to 1 (Mody and Sandri 2012).”
Predicting Distress in European Banks (2014, background): “Demirgüç-Kunt and Detragiache (2000), Davis and Karim (2008a,b) and Sun (2011) analyse banking crises with a global country coverage, whereas Hutchison (2003) and Mody and Sandri (2012) focus on European countries, where the latter study concerns the recent crisis.”
The European Sovereign Debt Crisis (2012, background): “…the scale of the recession and rising estimates of prospective banking-sector losses on bad loans in a number of countries also had a negative indirect impact on sovereign bond values, since investors recognized that a deteriorating banking sector posed fi scal risks (Mody and Sandri 2012).”