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Book part
Publication date: 23 October 2017

Julius Horvath and Alfredo Hernandez Sanchez

In the domestic credit market creditor and debtor rights are clearly defined. In contrast, sovereign debt repayment is largely contingent on the debtor government’s…

Abstract

In the domestic credit market creditor and debtor rights are clearly defined. In contrast, sovereign debt repayment is largely contingent on the debtor government’s willingness to repay as enforcement of contracts at the international level is limited. In this chapter we explore different sources of sovereign debt crises as opportunistic and myopic behavior by debtor nations, over-consumption of imported goods, credit temptation by lenders eager to allocate savings surpluses, and unexpected consequences of initially seen appropriate policies. We explore how these factors have played out in the Euro-debt crisis and outline a framework for creditor responsibility to complement debtor self-restraint.

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Economic Imbalances and Institutional Changes to the Euro and the European Union
Type: Book
ISBN: 978-1-78714-510-8

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Article
Publication date: 14 May 2021

Ioannis Katsampoxakis

The paper examines the impact of the deteriorating fiscal conditions of Eurozone countries on spillover effects on bank credit margins. It is investigated whether these…

Abstract

Purpose

The paper examines the impact of the deteriorating fiscal conditions of Eurozone countries on spillover effects on bank credit margins. It is investigated whether these effects have been reduced after European Central Bank’s (ECB) signaling of pursuing an expansionary, unconventional, monetary policy to address the debt crisis in Eurozone.

Design/methodology/approach

A general econometric panel model is applied to investigate spillover effects between Eurozone countries and bank credit margins. In total, three periods are examined: the period before the peak of the global financial crisis and the beginning of the Irish banking crisis, the period during the debt and bank crisis in Eurozone and the period after ECB's signaling of extremely aggressive monetary easing.

Findings

According to empirical results, before the peak of the global financial crisis there was no substantial credit risk transfer from Eurozone sovereigns to banks. During the period of debt and bank crisis in Eurozone, the deterioration of the fiscal situation of Eurozone countries had a significant impact on bank Credit Default Swap (CDS) spreads. After ECB's signaling of extremely aggressive monetary easing, it does not seem to be any significant relationship between Eurozone sovereigns and bank CDS spreads. These findings reinforce the assessment that ECB's measures were effective, achieving the key objective of normalizing economic conditions and ensuring financial stability in Eurozone.

Research limitations/implications

A question is whether effects can change when the corresponding contraction will lead to a reinstatement of “normal” conditions. Would there be a reversal of risk premium trends in bond markets? Although the answer from casual observations seems to be negative, it is a valid research question to be examined. An interesting issue concerning the unconventional monetary policy measures implemented by ECB concerns the issues of moral hazard that they incorporate, something that could not be addressed. Another research perspective could be the use of the beta coefficient to measure the systematic and unsystematic risk of banking sector shares.

Practical implications

The results have strong implications for ECB and European banking regulation. Regulators should mainly pay more attention to the amount and concentration of sovereign debt held by banks. Eurozone financial system could be less vulnerable to the sovereign credit risk. It raised the critical question of whether a more strict regulation is needed. Regulators should not intervene if not necessary, but they must prevent the transmission of crises between markets. This will likely bring trust to the developed countries' sovereign debt and the portfolios of the financial institutions, which hold most of this debt will be considered safe as well.

Social implications

The conclusions provide a safe counterweight in various respects. First, the negative effects and the need to rapidly cease or limit such policies. Second, the financial stability aimed by ECB. Such policies contain the possibility of a subsequent moral hazard related to Member State and bank behavior. However, these contingencies need to be assessed with the benefits resulting from the restoration of financial markets and the disconnection between banking and sovereign credit risk. This leads Eurozone's financial system to become less vulnerable to the sovereign credit risk and therefore more safe, helping to restore confidence in the real economy.

Originality/value

Contribution in terms of methodology and conclusions. It offers important conclusions regarding the limitations of yields and volatility of CDS spreads. It examines the spillover effects of the fiscal situation of Eurozone countries on banking institutions by extending the existing methodology and introducing new questions focusing on the reaction of CDS market to the ECB monetary policy, the reduction of risk premiums at sovereign and banking level and the gradual reduction of interdependence between them.

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EuroMed Journal of Business, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1450-2194

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Book part
Publication date: 23 October 2017

Tiago Cardao-Pito

In the euro’s initial years, Greece, Ireland, Italy, Portugal and Spain observed capital flow bonanzas and credit-booms, two cycles known to precede banking crises

Abstract

In the euro’s initial years, Greece, Ireland, Italy, Portugal and Spain observed capital flow bonanzas and credit-booms, two cycles known to precede banking crises. Domestic banks fuelled those cycles via funding obtained from foreign financial institutions. Yet, these countries’ banking and financial crises have unfolded in different modes. In Ireland and Spain, credit-booms propelled real-estate bubbles, which dragged banks into crises, with governments’ accounts later being affected when rescuing banks (Spanish regional banks, and all Irish major banks). In Greece and Italy, extra monetary means perpetuated government imbalances (e.g. debt levels above 100% of GDP, large yearly deficits). More severely in Greece, banks were brought into crises by sovereign crises. In Portugal, a mixture of private and public sector–led crises have occurred. Our comparative study finds that these crises: (1) are connected to shocks and imbalances caused by dangerous banking sector cycles during the monetary integration process; (2) were not mere expansions of the US subprime crisis; (3) were not only caused by country-specific features and institutions; and (4) followed distinct paths, therefore, a uniform model encompassing all post-euro crises cannot exist.

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Economic Imbalances and Institutional Changes to the Euro and the European Union
Type: Book
ISBN: 978-1-78714-510-8

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Article
Publication date: 17 August 2015

Florian Kiesel, Felix Lücke and Dirk Schiereck

This study aims to analyze the impact and effectiveness of the regulation on the European sovereign Credit Default Swap (CDS) market. The European sovereign debt crisis

Abstract

Purpose

This study aims to analyze the impact and effectiveness of the regulation on the European sovereign Credit Default Swap (CDS) market. The European sovereign debt crisis has drawn considerable attention to the CDS market. CDS have the ability of a speculative instrument to bet against a sovereign default. Therefore, the Regulation (EU) No. 236/2012 was introduced as the worldwide first uncovered CDS regulation. It prohibits buying uncovered sovereign CDS contracts in the European Union (EU).

Design/methodology/approach

First, this paper measures spread changes of sovereign CDS of the EU member states around regulation specific event dates to detect whether and when European sovereign CDS reacts to regulation announcements and the enforcement of regulation. Second, it compares the CDS long-term stability of the EU sample with a non-EU sample based on 44 non-EU sovereign CDS entities.

Findings

The results indicate widening CDS spreads prior to the regulation, and stable CDS spreads following the introduction of the regulation. In particular, sovereign CDS of European crisis-hit entities are stable since the regulation was introduced.

Originality/value

The results show that since the regulation of uncovered CDS in the EU has been enacted, the sovereign CDS market is stable and less volatile. Based on the theory about speculation on uncovered sovereign CDS by betting on the reference entity’s default, the introduction of Regulation (EU) No. 236/2012 appears to be an appropriate measure to stabilize markets and reduce speculation on sovereign defaults.

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The Journal of Risk Finance, vol. 16 no. 4
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 18 May 2015

Finn Marten Körner and Hans-Michael Trautwein

The purpose of this paper is to test the hypothesis that major credit rating agencies (CRAs) have been inconsistent in assessing the implications of monetary union…

Abstract

Purpose

The purpose of this paper is to test the hypothesis that major credit rating agencies (CRAs) have been inconsistent in assessing the implications of monetary union membership for sovereign risks. It is frequently argued that CRAs have acted procyclically in their rating of sovereign debt in the European Monetary Union (EMU), underestimating sovereign risk in the early years and over-rating the lack of national monetary sovereignty since the onset of the Eurozone debt crisis. Yet, there is little direct evidence for this so far. While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union.

Design/methodology/approach

While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union. This paper examines the major CRAs’ methodologies for rating sovereign debt and test their sovereign credit ratings for a monetary union bonus in good times and a malus, akin to the “original sin” problem of emerging market countries, in bad times.

Findings

Using a newly compiled dataset of quarterly sovereign bond ratings from 1990 until 2012, the panel regression estimation results find strong evidence that EMU countries received a rating bonus on euro-denominated debt before the European debt crisis and a large penalty after 2010.

Practical implications

The crisis has brought to light that EMU countries’ euro-denominated debt may not be considered as local currency debt from a rating perspective after all.

Originality/value

In addition to quantifying the local currency bonus and malus, this paper shows the fundamental problem of rating sovereign debt of monetary union members and provide approaches to estimating it over time.

Details

The Journal of Risk Finance, vol. 16 no. 3
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 6 April 2012

James R. Barth, Apanard (Penny) Prabha and Greg Yun

The purpose of this paper is to discuss and then analyze the interdependency between bank and sovereign risk before, during and after the financial crisis.

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Abstract

Purpose

The purpose of this paper is to discuss and then analyze the interdependency between bank and sovereign risk before, during and after the financial crisis.

Design/methodology/approach

The authors' approach is based upon an examination of 44 large banks headquartered in 13 countries; eight of these countries belong to the European Union, seven belong to the eurozone, and the remaining five belong to neither group. This provides a good comparison group of countries.

Findings

Evidence is found supporting the existence of significant bank and sovereign risk linkages. There are, however, different patterns in the relationships across countries and even across banks within the same country. Also, higher correlations between bank and sovereign risk are found in countries in which the ratio of the assets of banks relative to their home country's GDP is relatively high.

Research limitations/implications

Based upon the empirical results, allowing banks to invest in sovereign debt without requiring them to hold any capital against the “true” risk of such debt increases the likelihood of insolvency. This means that interdependencies between bank and sovereign risk are extremely important when setting regulatory capital requirements and considering whether action is needed to limit any increase in the likelihood of contagion.

Originality/value

The paper provides a new examination of the interdependencies between individual bank risk and the sovereign risk of the countries in which they are headquartered, with special emphasis on the recent global financial and eurozone crises.

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Journal of Financial Economic Policy, vol. 4 no. 1
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 30 January 2019

Inês Prates Pereira and Sérgio Lagoa

The purpose of this paper is to analyze the co-movements between the Portuguese, Greek, Irish and German government bond markets after the subprime crisis (2007 to 2013)…

Abstract

Purpose

The purpose of this paper is to analyze the co-movements between the Portuguese, Greek, Irish and German government bond markets after the subprime crisis (2007 to 2013), with a special focus on the European sovereign debt crisis. It aims to assess the existence of contagion between the Portuguese, Greece and Irish bond markets and to explore the phenomenon of flight-to-quality from the Portuguese and Greek bond markets to the German market.

Design/methodology/approach

The analysis is undertaken using a DCC-GARCH model with daily data for 10-year yield government bonds. The change in correlation from the stable periods to the crisis periods is used to identify contagion or flight-to-quality.

Findings

Results suggest that there was contagion between the Greek and Portuguese markets, and to a lesser extent between the Irish and Portuguese markets. During most of the identified crisis periods, there are evident flight-to-quality flows from the Portuguese and Greek bond markets to the German market.

Originality/value

This paper contributes to the literature by applying the methodology DCC-GARCH to several crisis episodes for the analysis of contagion and flight-to-quality during the European sovereign debt crisis.

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Journal of Financial Economic Policy, vol. 11 no. 2
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 27 July 2021

Catarina Proença, Maria Neves, José Carlos Dias and Pedro Martins

This paper aims to study the determinants of the sovereign debt ratings provided by the 3 main rating agencies for 32 European countries. It verifies the clusters of…

Abstract

Purpose

This paper aims to study the determinants of the sovereign debt ratings provided by the 3 main rating agencies for 32 European countries. It verifies the clusters of countries existing for each of the agencies, considering regional bias, and then analyzes whether the determinants were different before and after the global financial crisis. It also aims to explain how the determinants are taken into account for rich and developing countries, using a sample for the period between 2001 and 2008 and the period between 2009 and 2016.

Design/methodology/approach

To this purpose, this paper performs panel data estimation using an ordered Probit approach.

Findings

This method shows that for developing countries after the crisis, the relevant explanatory variables are the unemployment rate and the presence in the Eurozone. For rich countries, the inflation rate is pivotal after the crisis period.

Originality/value

This paper is the first to use a clustering methodology within sovereign debt rating literature, grouping the countries into cohesive clusters according to their sovereign debt ratings along with the proposed time frame. Moreover, it explains, which countries belong to strong or weak groups, according to the rating agencies under discussion; and, in these groups, it identifies the sovereign rating determinants.

Details

Journal of Financial Economic Policy, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1757-6385

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Case study
Publication date: 20 January 2017

George (Yiorgos) Allayannis and Adam Risell

In January 2011, during the World Economic Forum's annual meeting in Davos, Switzerland, Jason Sterling, a hedge fund manager, was conducting online research to see if he…

Abstract

In January 2011, during the World Economic Forum's annual meeting in Davos, Switzerland, Jason Sterling, a hedge fund manager, was conducting online research to see if he could trade on any newsworthy information emerging from the summit. Sterling's fund traded primarily in sovereign debt, and he needed to figure out if European leaders would be able to come up with a viable solution to the crisis or whether the debt crisis would lead to the default of several European nations. He knew that if a solution was not found in the coming weeks, the sovereign debt markets could be thrown into turmoil.

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Darden Business Publishing Cases, vol. no.
Type: Case Study
ISSN: 2474-7890
Published by: University of Virginia Darden School Foundation

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Article
Publication date: 21 November 2016

Carlos Cabral-Cardoso, Maria Céu Cortez and Luísa Lopes

The purpose of this paper is to examine, from the venture capital (VC) managers’ perspective, the impact of the international financial and sovereign debt crises on the VC…

Abstract

Purpose

The purpose of this paper is to examine, from the venture capital (VC) managers’ perspective, the impact of the international financial and sovereign debt crises on the VC industry in Portugal, and the changes and adjustments VC managers were forced to adopt to their procedures and current practices to cope with these challenges.

Design/methodology/approach

A two-step research design was adopted to best capture the dynamics of the crisis. Data were collected through in-depth semi-structured interviews and content analysed. The initial set of interviews with ten VC managers was conducted in 2011, immediately before the country bailout; and the second set in 2013, when the full impact of the debt crisis was being felt.

Findings

The study shows that the crises had a significant impact on the VC industry producing a complex and dynamic environment with high levels of uncertainty. The VC managers’ contradictory perceptions reflect their own struggle to figure out the best way to deal with the pressures in such a volatile environment where new opportunities may also arise. In general, VC firms became more selective adopting a more prudential attitude and tighter control mechanisms.

Originality/value

This study contributes to the field by analysing, from the VC managers’ perspective, the cumulative impact of the international financial and sovereign debt crisis on a European VC market with specific features: small dimension of the industry operating in a bank-centred capital market and where family-owned SMEs predominate.

Details

Journal of Small Business and Enterprise Development, vol. 23 no. 4
Type: Research Article
ISSN: 1462-6004

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