Does the European Financial Stability Facility Bail Out Sovereigns or Banks? An Event Study

European Banking Center Discussion Paper No. 2011-031

CentER Discussion Paper Series No. 2011-118

42 Pages Posted: 14 Nov 2011

See all articles by Harry Huizinga

Harry Huizinga

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)

Bálint L. Horváth

University of Bristol

Date Written: November 10, 2011

Abstract

On May 9, 2010 euro zone countries announced the creation of the European Financial Stability Facility as a response to the sovereign debt crisis. This paper investigates the impact of this announcement on bank share prices, bank CDS spreads and sovereign CDS spreads. The main private beneficiaries were bank creditors, especially of banks heavily exposed to southern Europe and Ireland and located in countries characterized by weak public finances.

Furthermore, countries with weak public finances and banking systems heavily exposed to southern Europe and Ireland benefited, as evidenced by lower sovereign CDS spreads. The combined gains of bank debt holders and shareholders exceed the increase in the value of their sovereign debt exposures, suggesting that banks saw their contingent claim on the financial safety net increase in value.

Keywords: Bailout, Banking, CDS spreads, Sovereign debt

JEL Classification: G21, G28, H63

Suggested Citation

Huizinga, Harry and Horváth, Bálint L., Does the European Financial Stability Facility Bail Out Sovereigns or Banks? An Event Study (November 10, 2011). European Banking Center Discussion Paper No. 2011-031, CentER Discussion Paper Series No. 2011-118, Available at SSRN: https://ssrn.com/abstract=1957584 or http://dx.doi.org/10.2139/ssrn.1957584

Harry Huizinga (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2623 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Bálint L. Horváth

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

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