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Flight-to-liquidity flows in the euro area sovereign debt crisis


  • Juan Ángel García

    (European Central Bank)

  • Ricardo Gimeno

    (Banco de España)


In periods of market stress, portfolio reallocations in bond markets reflect both safety and liquidity concerns. Using sovereign and national agency bonds, we construct indicators of liquidity premia in major euro area bond markets; we document the weakening of the correlation between core and periphery market liquidity during the euro area sovereign bond crisis; and we identify several episodes of significant flight-to-liquidity (FTL) flows above and beyond flight-to-safety (FTS) spells in the period 2009-13. We show that FTL flows led to significant inverse moves in sovereign bond yields in euro area core and periphery markets. Moreover, FTL flows triggered declines in core and periphery stock markets and are associated with lower macroeconomic confidence in the euro area as a whole, which underscores the importance of FTL episodes for investors and policymakers alike.

Suggested Citation

  • Juan Ángel García & Ricardo Gimeno, 2014. "Flight-to-liquidity flows in the euro area sovereign debt crisis," Working Papers 1429, Banco de España.
  • Handle: RePEc:bde:wpaper:1429

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    References listed on IDEAS

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    2. Marta Gómez-Puig & Mary Pieterse-Bloem & Simón Sosvilla-Rivero, 2022. ""Dynamic connectedness between credit and liquidity risks in EMU sovereign debt markets"," IREA Working Papers 202217, University of Barcelona, Research Institute of Applied Economics, revised Oct 2022.
    3. Gómez-Puig, Marta & Pieterse-Bloem, Mary & Sosvilla-Rivero, Simón, 2023. "Dynamic connectedness between credit and liquidity risks in euro area sovereign debt markets," Journal of Multinational Financial Management, Elsevier, vol. 68(C).
    4. Neri, Stefano & Gerali, Andrea, 2019. "Natural rates across the Atlantic," Journal of Macroeconomics, Elsevier, vol. 62(C).
    5. Johannes W. Fedderke, 2020. "Is the Phillips curve framework still useful for understanding inflation dynamics in South Africa," Working Papers 10142, South African Reserve Bank.
    6. Sören Radde & Cristina Checherita-Westphal & Wei Cui, 2015. "Government Bond Liquidity and Sovereign-Bank Interlinkages," SFB 649 Discussion Papers SFB649DP2015-032, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    7. İshak Demi̇r & Burak A. Eroğlu & Seçi̇l Yildirim‐Karaman, 2022. "Heterogeneous Effects of Unconventional Monetary Policy on the Bond Yields across the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(5), pages 1425-1457, August.
    8. Hong, Zhiwu & Niu, Linlin & Zhang, Chen, 2022. "Affine arbitrage-free yield net models with application to the euro debt crisis," Journal of Econometrics, Elsevier, vol. 230(1), pages 201-220.
    9. Gutkowski, Violeta A., 2021. "Sovereign illiquidity and recessions," Journal of Economic Dynamics and Control, Elsevier, vol. 122(C).

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    More about this item


    liquidity premia; flight to liquidity; flight to safety; sovereign debt crisis;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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