Credit Risk in the Euro area
AbstractWe construct credit risk indicators for euro area banks and non-financial corporations. These are the average spreads on the yield of euro area private sector bonds relative to the yield on German federal government securities of matched maturities. The indicators are also constructed at the country level for Germany, France, Italy and Spain. These indicators reveal that the financial crisis of 2008 has dramatically increased the cost of market funding for both banks and non-financial firms. In contrast, the prior recession following the 2000 U.S. dot-com bust led to widening credit spreads of non-financial firms but had no effect on the credit spreads of financial firms. The 2008 financial crisis also led to a systematic divergence in credit spreads for financial firms across national boundaries. This divergence in cross-country credit risk increased further as the European debt crisis has unfolded since 2010. Since that time, credit spreads for both non-financial and financial firms increasingly reflect national rather than euro area financial conditions. Consistent with this view, credit spreads provide substantial predictive content for a variety of real activity and lending measures for the euro area as a whole and for individual countries. VAR analysis implies that disruptions in corporate credit markets lead to sizeable contractions in output, increases in unemployment, and declines in inflation across the euro area.
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Bibliographic InfoPaper provided by Banque de France in its series Working papers with number 482.
Length: 57 pages
Date of creation: 2014
Date of revision:
credit cycle; euro area; financial crisis.;
Other versions of this item:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-05-09 (All new papers)
- NEP-BAN-2014-05-09 (Banking)
- NEP-EEC-2014-05-09 (European Economics)
- NEP-FMK-2014-05-09 (Financial Markets)
- NEP-MAC-2014-05-09 (Macroeconomics)
- NEP-OPM-2014-05-09 (Open Economy Macroeconomics)
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