Credit Spread Interdependencies of European States and Banks During the Financial Crisis

38 Pages Posted: 17 May 2011 Last revised: 16 Jan 2012

See all articles by Adrian Alter

Adrian Alter

International Monetary Fund

Yves Stephan Schüler

Deutsche Bundesbank

Date Written: December 10, 2011


We investigate the interdependence of the default risk of several Eurozone countries (France, Germany, Italy, Ireland, Netherlands, Portugal, and Spain) and their domestic banks during the period June 2007 - May 2010, using daily credit default swaps (CDS). Bank bailout programs changed the composition of both banks’ and sovereign balance sheets and, moreover, affected the linkage between the default risk of governments and their local banks. Our main findings suggest that in the period before bank bailouts the contagion disperses from bank credit spreads into the sovereign CDS market. After bailouts, a financial sector shock affects more strongly sovereign CDS spreads in the short-run, however, the impact becomes insignificant at a long horizon. Furthermore, government CDS spreads become an important determinant of banks’ CDS series. The interdependence of government and bank credit risk is heterogeneous across countries, but homogeneous within the same country.

Keywords: credit default swaps, financial crisis, private-to-public risk transfer, bailout programs, government interventions, cointegration, generalized impulse responses

JEL Classification: C58, G01, G18, G21

Suggested Citation

Alter, Adrian and Schüler, Yves Stephan, Credit Spread Interdependencies of European States and Banks During the Financial Crisis (December 10, 2011). Available at SSRN: or

Adrian Alter (Contact Author)

International Monetary Fund ( email )

700 19th St NW
Washington, DC 20431
United States

Yves Stephan Schüler

Deutsche Bundesbank ( email )

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

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