The Invisible Hand of the Government: 'Moral Suasion' During the European Sovereign Debt Crisis
66 Pages Posted: 12 Mar 2016 Last revised: 21 Jul 2018
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The Invisible Hand of the Government: 'Moral Suasion' During the European Sovereign Debt Crisis
The Invisible Hand of the Government: 'Moral Suasion' During the European Sovereign Debt Crisis
Date Written: July 11, 2018
Abstract
Using proprietary data on banks’ monthly securities holdings, we show that during the European sovereign debt crisis, domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of domestic sovereign bonds during months when the government needed to roll over a relatively large amount of maturing debt. This result cannot be explained by risk shifting, carry trading, or regulatory compliance. Banks under the influence of the government, small banks, and banks with weaker balance sheets were especially prone to ‘moral suasion’. We also find some evidence of credit contraction to households following months with high government refinancing need.
Keywords: Sovereign debt, sovereign-bank loop, moral suasion
JEL Classification: F34, G21, H63
Suggested Citation: Suggested Citation