Banking and Debt Crises in Europe: The Dangerous Liaisons?
University of Maastricht - Department of Economics
Franz C. Palm
University of Maastricht - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)
CESifo Working Paper Series No. 3001
The potential mutation of the Sub-Prime banking crisis into a sovereign debt one in Euro area countries is investigated. After reviewing the criteria used to measure the debt vulnerability, the balance sheet approach (BSA) is presented in order to illustrate the potential connections between these two types of crises. A graphical analysis yields evidence that at the end 2009 the probability of observing a Euro area country defaulting is less likely than six month before. Nevertheless, the serious threats, which concern Greece and Ireland, do not permit us to exclude the occurrence of a contagious, or self-fulfilling, sovereign debt or currency crises in Euro area in the future.
Number of Pages in PDF File: 30
Keywords: banking crisis, sovereign debt crisis, European Union
JEL Classification: E32, F36
Date posted: April 6, 2010