An Anatomy of Credit Risk Transfer between Sovereign and Financials in the Eurozone Crisis
Journal of International Financial Markets, Institutions & Money, Forthcoming
41 Pages Posted: 23 Dec 2015
Date Written: December 14, 2015
In this paper we assess the effectiveness of large scale bailouts aiming at preventing a financial crisis from further propagating into a systemic risk. We examine the structural changes in the relationship between the sovereign and financial institutions’ credit default swap spreads during the European sovereign debt crisis. Before the first Greek bailout by the EFSF, the sovereign and financial sectors exhibit a two-way feedback effect for both the short and the long runs. Crucially, we find that after the first Greek bailout, shocks in the financial sector either exert significantly negative impacts or lose influences on the sovereign sector. In contrast, all the later bailouts by the EFSF (the second Greek bailout, Irish and Portugal bailouts) do not show this pattern change in the two-way risk transfer relationship.
Keywords: Credit Default Risk, CDS Spreads, Sovereign Debt, Financial Institutions, European Financial Stability Facility (EFSF)
JEL Classification: E02, G01, G13, G20, G28
Suggested Citation: Suggested Citation