What Explains the Surge in Euro Area Sovereign Spreads During the Financial Crisis of 2007-09?

49 Pages Posted: 27 Dec 2009

See all articles by Maria Grazia Attinasi

Maria Grazia Attinasi

European Central Bank (ECB)

Cristina D. Checherita-Westphal

European Central Bank (ECB)

Christiane Nickel

European Central Bank (ECB)

Date Written: December 17, 2009

Abstract

This paper uses a dynamic panel approach to explain the determinants of widening sovereign bond yield spreads vis-à-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 analysed 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.

Keywords: Fiscal Policy, Sovereign Spreads, Fiscal Announcements

JEL Classification: E62, E43, G12

Suggested Citation

Attinasi, Maria Grazia and Checherita-Westphal, Cristina D. and Nickel, Christiane, What Explains the Surge in Euro Area Sovereign Spreads During the Financial Crisis of 2007-09? (December 17, 2009). ECB Working Paper No. 1131. Available at SSRN: https://ssrn.com/abstract=1520351

Maria Grazia Attinasi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Cristina D. Checherita-Westphal (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Christiane Nickel

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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