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Euro area sovereign yield spreads as determinants of private sector borrowing costs

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  • Theobald, Thomas
  • Tober, Silke

Abstract

We regress long-term private-sector borrowing rates on a money market rate, a term premium and credit risk. As a contribution to the current debate about European safe assets, our interest is in quantifying the impact of euro area sovereign bond spreads on private-sector lending by employing it as a proxy for private-sector credit risk. Panel estimates show significant, albeit rather small long-run effects. Another finding is large cross-country heterogeneity. Using linear country-specific estimates, we find the effect to be significant in only some countries, but the size of the maximum effect in these countries exceeds the average one more than three-fold. Furthermore, for one country, we find an asymmetrical effect with positive spread changes having greater impact on private-sector borrowing costs than negative ones. Substantial heterogeneity of the spillover effect between euro area countries indicates the presence of financial valuation effects based not only on economic fundamentals. This, in turn, implies that spillovers may entail contagion costs. Overall, our results suggest that these costs are considerable in the euro area and will remain so until an effective form of European safe assets is created.

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  • Theobald, Thomas & Tober, Silke, 2020. "Euro area sovereign yield spreads as determinants of private sector borrowing costs," Economic Modelling, Elsevier, vol. 84(C), pages 27-37.
  • Handle: RePEc:eee:ecmode:v:84:y:2020:i:c:p:27-37
    DOI: 10.1016/j.econmod.2019.03.004
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    Cited by:

    1. Foglia, Matteo & Angelini, Eliana, 2020. "The diabolical sovereigns/banks risk loop: A VAR quantile design," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).
    2. Sebastian Dullien & Thomas Theobald & Silke Tober & Andrew Watt, 2020. "Why Current EU Proposals for Corona-Related Financial Aid Cannot Replace Coronabonds," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 55(3), pages 152-155, May.
    3. Beqiraj, Elton & Patella, Valeria & Tancioni, Massimiliano, 2021. "Fiscal stance and the sovereign risk pass-through," Economic Modelling, Elsevier, vol. 102(C).

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    More about this item

    Keywords

    Autoregressive distributed lag; Composite cost of borrowing; Sovereign spread;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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