The Effect of the PSI in the Relationship between Sovereign and Bank Credit Risk Evidence from the Euro Area

Multinational Finance Journal, 2019, vol. 23, no. 3/4

62 Pages Posted: 1 Mar 2020

See all articles by Michalis-Panayiotis Papafilis

Michalis-Panayiotis Papafilis

University of Piraeus

Maria Psillaki

University of Piraeus

Dimitris Margaritis

University of Auckland - Business School

Date Written: 2019

Abstract

This study examines the nexus between sovereigns and banks during a crisis with a focus on the effects of PSI, the voluntary exchange program of Greek sovereign bonds with private sector involvement. The effectiveness of the program is evaluated through its impact on credit default swaps of 8 Eurozone countries and 21 banks, using daily data from 2009 to 2014. Using linear and nonlinear causality analyses, it is found that the link between sovereign and bank risk weakened after PSI, while the persistence and magnitude of lead-lag interactions also declined in the same period. A difference-in-difference model confirms this result. The findings are also robust to second moment filtering, with GARCH-BEKK residuals indicating the presence of significant albeit declining nonlinear causal effects. The empirical evidence suggests that sovereign debt restructuring initiatives, such as PSI, could be an effective policy measure to ease off pressure on the nexus between banks and their sovereigns.

Keywords: CDS spreads, PSI, sovereign/bank credit risk, contagion, nonlinear causality

JEL Classification: F34, F42, G28, H12, H63

Suggested Citation

Papafilis, Michalis-Panayiotis and Psillaki, Maria and Margaritis, Dimitris, The Effect of the PSI in the Relationship between Sovereign and Bank Credit Risk Evidence from the Euro Area (2019). Multinational Finance Journal, 2019, vol. 23, no. 3/4, Available at SSRN: https://ssrn.com/abstract=3520620

Michalis-Panayiotis Papafilis (Contact Author)

University of Piraeus ( email )

80 Karaoli & Dimitriou str.
Piraeus, 18534
Greece

Maria Psillaki

University of Piraeus ( email )

80 Karaoli&Dimitriou str.
Piraeus, 18534
Greece

HOME PAGE: http://www.unipi.gr/unipi/en/oik-dunamiko-en/oik-dep-all-en/item/1186

Dimitris Margaritis

University of Auckland - Business School ( email )

12 Grafton Rd
Auckland, 1010
New Zealand

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