Money Market Integration and Sovereign CDs Spreads Dynamics in the New EU States

15 Pages Posted: 17 Dec 2010

See all articles by Petar Chobanov

Petar Chobanov

Bulgarian National Bank

Amine Lahiani

Université Paris Ouest - Nanterre, La Défense - EconomiX

Nikolay Nenovsky

Bulgarian National Bank

Date Written: October 16, 2010

Abstract

When the first phase of the crisis focused primarily on the interbank market volatility, the second phase spread on the instability of public finance. Although the overall stance of public finances of the new members is better than the old member countries, the differences within the new group are significant (from the former Estonia to the laggard Hungary). Sovereign CDS spreads have become major variables focused on risks and expectations about the fiscal situation of different countries. In the paper we investigate, first, whether there is a link in the new member states (NMS) between the expectations about the condition of their public finances and the dynamics of money markets, including integration of national money markets with the euro area. In others word we contribute to clarify the relationship between fiscal and liquidity risks as major components of systemic risk. Second, we look on the particularities of this relationship through the different phases of the crisis and across the different countries using different monetary regimes. This concerns mostly two opposite extreme monetary regimes, namely, currency boards (and quasi-fixed exchange rate) - Bulgaria, Estonia, Latvia, Lithuania, or inflation targeting - Poland, Czech Republic, Hungary and Romania. The results obtained form the high frequency panel data models support the theoretical hypotheses and policy intuition that exists strong relationship between the liquidity risk (measured by the short term money markets) and fiscal risk (measured by CDS) and that this link is extremely unstable and in some sense nonlinear during the financial crisis. Our study confirm that the strong link between monetary and public finance risk as apart of total systemic risk increase during the crisis especially for currency boards regimes, when the link becomes stronger and pronounced. For the inflation targeting countries the link became weaker and less pronounced.

Keywords: Money Markets, Sovereign CDS Spreads, EU Enlargement, Monetary Regimes, Financial Crisis

JEL Classification: E43, G10, P20, F31, F34

Suggested Citation

Chobanov, Petar and Lahiani, Amine and Nenovsky, Nikolay, Money Market Integration and Sovereign CDs Spreads Dynamics in the New EU States (October 16, 2010). William Davidson Institute Working Paper No. 1002, Available at SSRN: https://ssrn.com/abstract=1726483 or http://dx.doi.org/10.2139/ssrn.1726483

Petar Chobanov

Bulgarian National Bank ( email )

str "St. Sofia" 5
Sofia, 1040
Bulgaria

Amine Lahiani

Université Paris Ouest - Nanterre, La Défense - EconomiX ( email )

200 Avenue de la République
Nanterre cedex, Nanterre Cedex 92000
France

Nikolay Nenovsky (Contact Author)

Bulgarian National Bank ( email )

str "St. Sofia" 5
Sofia, 1040
Bulgaria
+ 359 2 9145 1239 (Phone)
+ 359 2 980 24 25 (Fax)

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