Does the European Financial Stability Facility Bail Out Sovereigns or Banks? An Event Study
CentER Discussion Paper Series No. 2011-118
42 Pages Posted: 14 Nov 2011
Date Written: November 10, 2011
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: Suggested Citation