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Euro Area Sovereign Risk During the Crisis

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  • Edda Zoli
  • Silvia Sgherri

Abstract

While the use of public resources is critical to cushion the impact of the financial crisis on the euro-area economy, it is key that the entailed fiscal costs not be seen by markets as undermining fiscal sustainability. From this perspective, to what extent do movements in euro area sovereign spreads reflect country-specific solvency concerns? In line with previous studies, the paper suggests that euro area sovereign risk premium differentials tend to comove over time and are mainly driven by a common time-varying factor, mimicking global risk repricing. Since October 2008, however, there is evidence that markets have become progressively more concerned about the potential fiscal implications of national financial sectors'' frailty and future debt dynamics. The liquidity of sovereign bond markets still seems to play a significant (albeit fairly limited) role in explaining changes in euro area spreads.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/222.

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Length: 23
Date of creation: 01 Oct 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/222

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Keywords: Euro Area; Fiscal policy; European Union; External debt; Financial sector; Fiscal management; Fiscal sector; Public finance; Risk premium; Sovereign debt; bond; sovereign bond; bonds; bond markets; financial markets; bond market; government bond; bond spreads; government bonds; sovereign bond markets; fiscal sustainability; financial system; financial institutions; fiscal implications; financial market; fiscal balance; sovereign bonds; government bond market; fiscal discipline; stock market; fiscal deficits; fiscal stimulus; international financial markets; fiscal costs; financial systems; debt-service; fiscal positions; aggregate demand; bond spread; fiscal vulnerabilities; fiscal expansion; fiscal variables; treasury bonds; bond yield; public finances; national fiscal rules; bond prices; fiscal conditions; fiscal cost; asset markets; tax revenues; debt stock; financial derivative; derivative; corporate bonds; fiscal rules; fiscal adjustments; money market; fiscal policies; future fiscal deficits; fiscal developments; fiscal deficit; bond yields; government bond markets;

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References

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  1. Simone Manganelli & Guido Wolswijk, 2009. "What drives spreads in the euro area government bond market?," Economic Policy, CEPR & CES & MSH, vol. 24, pages 191-240, 04.
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  10. Gomez-Puig, Marta, 2006. "Size matters for liquidity: Evidence from EMU sovereign yield spreads," Economics Letters, Elsevier, vol. 90(2), pages 156-162, February.
  11. Xavier Debrun & Laurent Moulin & Alessandro Turrini & Joaquim Ayuso-i-Casals & Manmohan S. Kumar, 2008. "Tied to the mast? National fiscal rules in the European Union," Economic Policy, CEPR & CES & MSH, vol. 23, pages 297-362, 04.
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