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Does the European Financial Stability Facility bail out sovereigns or banks? An event study

  • Horvath, Balint
  • Huizinga, Harry

On May 9, 2010 euro zone countries announced the creation of the European Financial Stability Facility as a response to the sovereign debt crisis. This paper investigates the impact of this announcement on bank share prices, bank CDS spreads and sovereign CDS spreads. The main private beneficiaries were bank creditors, especially of banks heavily exposed to southern Europe and Ireland and located in countries characterized by weak public finances. Furthermore, countries with weak public finances and banking systems heavily exposed to southern Europe and Ireland benefited, as evidenced by lower sovereign CDS spreads. The combined gains of bank debt holders and shareholders exceed the increase in the value of their sovereign debt exposures, suggesting that banks saw their contingent claim on the financial safety net increase in value.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8661.

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Date of creation: Nov 2011
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Handle: RePEc:cpr:ceprdp:8661
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  1. Pietro Veronesi & Luigi Zingales, 2009. "Paulson's Gift," NBER Working Papers 15458, National Bureau of Economic Research, Inc.
  2. Demirgüç-Kunt, Asli & Huizinga, Harry, 2013. "Are banks too big to fail or too big to save? International evidence from equity prices and CDS spreads," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 875-894.
  3. Gerlach, Stefan & Schulz, Alexander & Wolff, Guntram B., 2010. "Banking and sovereign risk in the euro area," Discussion Paper Series 1: Economic Studies 2010,09, Deutsche Bundesbank, Research Centre.
  4. Edda Zoli & Silvia Sgherri, 2009. "Euro Area Sovereign Risk During the Crisis," IMF Working Papers 09/222, International Monetary Fund.
  5. Bank for International Settlements, 2009. "An assessment of financial sector rescue programmes," BIS Papers, Bank for International Settlements, number 48, 11.
  6. Stavros Panageas, 2009. "Optimal taxation in the presence of bailouts," NBER Working Papers 15405, National Bureau of Economic Research, Inc.
  7. Stavros Panageas, 2009. "Bailouts, the Incentive to Manage Risk, and Financial Crises," NBER Working Papers 15058, National Bureau of Economic Research, Inc.
  8. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2009. "Sovereign default, domestic banks and financial institutions," Economics Working Papers 1170, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2012.
  9. Ejsing, Jacob & Lemke, Wolfgang, 2009. "The Janus-headed salvation: sovereign and bank credit risk premia during 2008-09," Working Paper Series 1127, European Central Bank.
  10. Jorion, Philippe & Zhang, Gaiyan, 2007. "Good and bad credit contagion: Evidence from credit default swaps," Journal of Financial Economics, Elsevier, vol. 84(3), pages 860-883, June.
  11. Panageas, Stavros, 2010. "Bailouts, the incentive to manage risk, and financial crises," Journal of Financial Economics, Elsevier, vol. 95(3), pages 296-311, March.
  12. Michael R King, 2009. "Time to buy or just buying time? The market reaction to bank rescue packages," BIS Working Papers 288, Bank for International Settlements.
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