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Financial Repression in the European Sovereign Debt Crisis

41 Pages Posted: 27 Apr 2014 Last revised: 26 Sep 2014

Bo Becker

Stockholm School of Economics; Centre for Economic Policy Research (CEPR)

Victoria Ivashina

Harvard University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 25, 2014

Abstract

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

Becker, Bo and Ivashina, Victoria, Financial Repression in the European Sovereign Debt Crisis (April 25, 2014). Swedish House of Finance Research Paper No. 14-13; Paris December 2014 Finance Meeting EUROFIDAI - AFFI Paper. Available at SSRN: https://ssrn.com/abstract=2429767 or http://dx.doi.org/10.2139/ssrn.2429767

Bo Becker

Stockholm School of Economics ( email )

Drottninggatan 98
Dept. of Finance
111 60 Stockholm, 11160
Sweden

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Victoria Ivashina (Contact Author)

Harvard University ( email )

Harvard Business School
Baker Library 233
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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