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Credit Risk in the Euro Area

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  • Simon Gilchrist
  • Benoît Mojon

Abstract

We 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 sizable contractions in output, increases in unemployment, and declines in inflation across the euro area.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20041.

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Date of creation: Apr 2014
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Handle: RePEc:nbr:nberwo:20041

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  1. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 555-76, June.
  2. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-03, Board of Governors of the Federal Reserve System (U.S.).
  3. Ben S. Bernanke & Jean Boivin, 2001. "Monetary Policy in a Data-Rich Environment," NBER Working Papers 8379, National Bureau of Economic Research, Inc.
  4. Del Giovane, Paolo & Eramo, Ginette & Nobili, Andrea, 2011. "Disentangling demand and supply in credit developments: A survey-based analysis for Italy," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(10), pages 2719-2732, October.
  5. Vladimir Yankov & Egon Zakrajsek & Simon Gilchrist, 2009. "Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets," 2009 Meeting Papers, Society for Economic Dynamics 514, Society for Economic Dynamics.
  6. Niccolò Battistini & Marco Pagano & Saverio Simonelli, 2013. "Systemic Risk and Home Bias in the Euro Area," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 494, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  7. de Bondt, Gabe & Maddaloni, Angela & Peydró, José-Luis & Scopel, Silvia, 2010. "The euro area Bank Lending Survey matters: empirical evidence for credit and output growth," Working Paper Series, European Central Bank 1160, European Central Bank.
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Cited by:
  1. Schock, Matthias, 2014. "Do Eurozone yield spreads predict recessions?," Hannover Economic Papers (HEP), Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät dp-532, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.

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