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

Adrian Alter

International Monetary Fund

Yves Stephan Schüler

European Central Bank (ECB)

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.

Number of Pages in PDF File: 38

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

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Date posted: May 17, 2011 ; Last revised: January 16, 2012

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: https://ssrn.com/abstract=1843282 or http://dx.doi.org/10.2139/ssrn.1843282

Contact Information

Adrian Alter (Contact Author)
International Monetary Fund ( email )
700 19th St NW
Washington, DC 20431
United States
Yves Stephan Schüler
European Central Bank (ECB) ( email )
Sonnemannstrasse 22
Frankfurt am Main, 60314

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