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Impacts Of The Sovereign Default Crisis On The Czech Financial Sector

In: CNB Financial Stability Report 2011/2012

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Author Info

  • Kamil Janacek
  • Zlatuse Komarkova
  • Michal Hlavacek
  • Lubos Komarek

Abstract

This article discusses the experience of countries hit by debt crises as well as the channels of contagion of sovereign default risk to the financial system. It focuses primarily on identifying channels of contagion that might represent a relevant threat to the Czech economy and discusses their significance. Although sovereign default risk is currently relatively low for the Czech Republic thanks to its low level of government debt, an escalation of this risk would have significant impacts on the financial system given the comparatively high proportion of government bonds in banks' balance sheets. The article also illustrates the significance of cross-country contagion to sovereign credit premiums. Here, the transmission from the countries hit hardest by the debt crisis has weakened, but the Czech Republic's credit premium is diverging from the most stable countries at a time of market stress. The risk of heightened sensitivity of credit premiums to a country's debt may increase the costs of irresponsible fiscal policy in the future. It is therefore another factor that should be covered by financial stability analysis.

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Bibliographic Info

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This chapter was published in: Kamil Janacek & Zlatuse Komarkova & Michal Hlavacek & Lubos Komarek CNB Financial Stability Report 2011/2012, , chapter Thematic Article 3, pages 118-128, 2012.

This item is provided by Czech National Bank, Research Department in its series Occasional Publications - Chapters in Edited Volumes with number fsr1112/3.

Handle: RePEc:cnb:ocpubc:fsr1112/3

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  2. Fontana, Alessandro & Scheicher, Martin, 2010. "An analysis of euro area sovereign CDS and their relation with government bonds," Working Paper Series 1271, European Central Bank.
  3. Ebner, André, 2009. "An empirical analysis on the determinants of CEE government bond spreads," Emerging Markets Review, Elsevier, vol. 10(2), pages 97-121, June.
  4. Jan Frait & Luboš Komárek & Zlatuše Komárková, 2011. "Monetary Policy in a Small Economy after Tsunami: A New Consensus on the Horizon?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(1), pages 5-33, January.
  5. Diebold, Francis X. & Yilmaz, Kamil, 2012. "Better to give than to receive: Predictive directional measurement of volatility spillovers," International Journal of Forecasting, Elsevier, vol. 28(1), pages 57-66.
  6. Michael Gapen & Dale Gray & Cheng Hoon Lim & Yingbin Xiao, 2008. "Measuring and Analyzing Sovereign Risk with Contingent Claims," IMF Staff Papers, Palgrave Macmillan, vol. 55(1), pages 109-148, April.
  7. Christian Keller & Peter Kunzel & Marcos Souto, 2007. "Measuring Sovereign Risk in Turkey," IMF Working Papers 07/233, International Monetary Fund.
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