Self-Fulfilling Dynamics: The Interactions of Sovereign Spreads, Sovereign Ratings and Bank Ratings During the Euro Financial Crisis

53 Pages Posted: 18 Aug 2022

See all articles by G. S. Tavlas

G. S. Tavlas

Bank of Greece

Heather D. Gibson

Bank of Greece; Athens University of Economics and Business

Stephen G. Hall

University of Leicester - Department of Economics

Date Written: November 1, 2016

Abstract

During the euro-area financial crisis, interactions among sovereign spreads, sovereign credit ratings, and bank credit ratings appeared to have been characterized by selfgenerating feedback loops. To investigate the existence of feedback loops, we consider a panel of five euro-area stressed countries within a three-equation simultaneous system in which sovereign spreads, sovereign ratings and bank ratings are endogenous. We estimate the system using two approaches. First we apply GMM estimation, which allows us to calculate persistence and multiplier effects. Second, we apply a new, system timevarying- parameter technique that provides bias-free estimates. Our results show that sovereign ratings, sovereign spreads, and bank ratings strongly interacted with each other during the euro crisis, confirming strong doom-loop effects.

Keywords: euro area financial crisis, sovereign spreads, rating agencies

JEL Classification: E63, G12

Suggested Citation

Tavlas, George and Gibson, Heather D. and Hall, Stephen G., Self-Fulfilling Dynamics: The Interactions of Sovereign Spreads, Sovereign Ratings and Bank Ratings During the Euro Financial Crisis (November 1, 2016). Bank of Greece Working Paper No. 214, Available at SSRN: https://ssrn.com/abstract=4186698 or http://dx.doi.org/10.2139/ssrn.4186698

George Tavlas (Contact Author)

Bank of Greece ( email )

21 E. Venizelos Avenue
GR-10250 Athens
Greece
+30 10 323 7224 (Phone)
+30 10 323 3025 (Fax)

Heather D. Gibson

Bank of Greece ( email )

21 E. Venizelos Avenue
GR-10250 Athens
Greece
+301 32 35 803 (Phone)
+301 32 33 025 (Fax)

Athens University of Economics and Business

76 Patission Street
Athens, 104 34
Greece

Stephen G. Hall

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom

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