What Explains the Surge in Euro Area Sovereign Spreads During the Financial Crisis of 2007-09?
MARIA-GRAZIA ATTINASI, CRISTINA CHECHERITA and CHRISTIANE NICKEL
PFM, Vol. 10 No. 4, (2010)
This paper explains the determinants of widening sovereign bond yield spreads vis-ŕ-vis Germany in selected euro area countries during the period end-July 2007 to end-March 2009, when the financial turmoil developed into a full-blown financial and economic crisis. Emphasis is given to the role of fiscal fundamentals and government announcements of substantial bank rescue packages. The paper finds that higher expected budget deficits and/or higher government debt ratios relative to Germany contributed to higher government bond yield spreads in the euro area during the analyzed period. More importantly, the announcements of bank rescue packages have led to a re-assessment, from the part of investors, of sovereign credit risk, first and foremost through a transfer of risk from the private financial sector to the government.
Subscribers: Login to read this article
Guests: Subscribe to PFM, or purchase individual article access for $10.
The article is not available for automatic download. We will email the article to you as a PDF file upon receiving your payment, typically within 24 hours.