Euro Area Sovereign Risk During the Crisis

25 Pages Posted: 20 Oct 2009

See all articles by Silvia Sgherri

Silvia Sgherri

International Monetary Fund (IMF)

Edda Zoli

International Monetary Fund (IMF)

Date Written: October 2009

Abstract

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.

Keywords: Bond markets, Capital markets, European Union, External debt, Financial crisis, Financial sector, Fiscal management, Fiscal policy, Fiscal sector, Investment, Pricing policy, Public finance, Risk premium, Sovereign debt

Suggested Citation

Sgherri, Silvia and Zoli, Edda, Euro Area Sovereign Risk During the Crisis (October 2009). IMF Working Paper No. 09/222, Available at SSRN: https://ssrn.com/abstract=1490223

Silvia Sgherri (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Edda Zoli

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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