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Banking and Sovereign Risk in the Euro Area

53 Pages Posted: 19 Jul 2010  

Stefan Gerlach

Central Bank of Ireland; Centre for Economic Policy Research (CEPR)

Alexander Schulz

Deutsche Bundesbank

Guntram B. Wolff

Deutsche Bundesbank; University of Bonn - Center for European Integration Studies (ZEI)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2010

Abstract

We study the determinants of euro area sovereign bond spreads since the introduction of the euro. An aggregate risk factor is a main driver of spreads, both directly and indirectly by interacting with the size and structure of national banking sectors. When aggregate risk increases, countries with large banking sectors with low equity ratios experience greater widening in yield spreads, suggesting that financial markets perceive a larger risk that governments will have to rescue banks, increasing public debt and therefore sovereign risk. Moreover, government debt levels and forecasts of future fiscal deficits are also significant determinants of sovereign spreads.

Keywords: banking, EMU, liquidity, sovereign bond markets

JEL Classification: E43, E44, G12

Suggested Citation

Gerlach, Stefan and Schulz, Alexander and Wolff, Guntram B., Banking and Sovereign Risk in the Euro Area (May 2010). CEPR Discussion Paper No. DP7833. Available at SSRN: https://ssrn.com/abstract=1640355

Stefan Gerlach (Contact Author)

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Alexander Schulz

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Guntram Wolff

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

University of Bonn - Center for European Integration Studies (ZEI) ( email )

Regina-Pacis-Weg 3
Postfach 2220
D-53012 Bonn
Germany

HOME PAGE: http://www.uni-bonn.de/~guntram

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