Systemic Risk and Sovereign Debt in the Euro Area

SAFE Working Paper No. 37

57 Pages Posted: 17 Dec 2013

See all articles by Deyan Radev

Deyan Radev

Sofia University, Faculty of Economics and Business Administration

Multiple version iconThere are 3 versions of this paper

Date Written: December 13, 2013

Abstract

We introduce a new measure of systemic risk, the change in the conditional joint probability of default, which assesses the effects of the interdependence in the financial system on the general default risk of sovereign debtors. We apply our measure to examine the fragility of the European financial system during the ongoing sovereign debt crisis. Our analysis documents an increase in systemic risk contributions in the euro area during the post-Lehman global recession and especially after the beginning of the euro area sovereign debt crisis. We also find a considerable potential for cascade effects from small to large euro area sovereigns. When we investigate the effect of sovereign default on the European Union banking system, we find that bigger banks, banks with riskier activities, with poor asset quality, and funding and liquidity constraints tend to be more vulnerable to a sovereign default. Surprisingly, an increase in leverage does not seem to influence systemic vulnerability.

Keywords: Sovereign debt, Sovereign default, Financial distress, Systemic risk, Contagion, Banking stability, Tail risk

JEL Classification: C16, C61, G01, G21

Suggested Citation

Radev, Deyan, Systemic Risk and Sovereign Debt in the Euro Area (December 13, 2013). SAFE Working Paper No. 37, Available at SSRN: https://ssrn.com/abstract=2368283 or http://dx.doi.org/10.2139/ssrn.2368283

Deyan Radev (Contact Author)

Sofia University, Faculty of Economics and Business Administration ( email )

15, Tzar Osvoboditel Blvd.
Sofia, 1504
Bulgaria

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