Financial Repression in the European Sovereign Debt Crisis
Review of Finance, Forthcoming
41 Pages Posted: 27 Apr 2014 Last revised: 15 Feb 2018
Date Written: April 25, 2014
By the end of 2013, the share of government debt held by the domestic banking sectors of Eurozone countries was more than twice its 2007 level. We show that this type of increasing reliance on the domestic banking sector for absorbing government bonds generates a crowding out of corporate lending. For a given domestic firm, new debt is less likely to be a loan — i.e., the loan supply contracts — when local banks have purchased more domestic sovereign debt and when that debt is risky (as measured by CDS spreads). These effects are most pronounced in the period following the second Greek bailout in early 2010.
Keywords: Credit Cycles, Sovereign Debt, Financial Repression
JEL Classification: G11, G22, G30
Suggested Citation: Suggested Citation