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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.

Suggested Citation

  • Simon Gilchrist & Benoît Mojon, 2014. "Credit Risk in the Euro Area," NBER Working Papers 20041, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20041 Note: EFG ME
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    Cited by:

    1. Gaballo, Gaetano & Zetlin-Jones, Ariel, 2016. "Bailouts, moral hazard and banks׳ home bias for Sovereign debt," Journal of Monetary Economics, Elsevier, pages 70-85.
    2. Monica Billio & Roberto Casarin & Francesco Ravazzolo & Herman K. van Dijk, 2013. "Interactions between eurozone and US booms and busts: A Bayesian panel Markov-switching VAR model," Working Paper 2013/20, Norges Bank.
    3. Arianna Miglietta & Cristina Picillo & Mario Pietrunti, 2015. "The impact of CCPs' margin policies on repo markets," BIS Working Papers 515, Bank for International Settlements.
    4. Julián Caballero & Andres Fernandez & Jongho Park, 2016. "On Corporate Borrowing, Credit Spreads and Economic Activity in Emerging Economies: An Empirical Investigation," IDB Publications (Working Papers) 7793, Inter-American Development Bank.
    5. repec:wly:japmet:v:31:y:2016:i:7:p:1352-1370 is not listed on IDEAS
    6. Altavilla, Carlo & Darracq Pariès, Matthieu & Nicoletti, Giulio, 2015. "Loan supply, credit markets and the euro area financial crisis," Working Paper Series 1861, European Central Bank.
    7. Avouyi-Dovi, S. & Horny, G. & Sevestre, P., 2017. "The stability of short-term interest rates pass-through in the euro area during the financial market and sovereign debt crises," Journal of Banking & Finance, Elsevier, vol. 79(C), pages 74-94.
    8. Cristina Arellano & Andrew Atkeson & Mark Wright, 2016. "External and Public Debt Crises," NBER Macroeconomics Annual, University of Chicago Press, vol. 30(1), pages 191-244.
    9. F. Koulischer, 2015. "Asymmetric shocks in a currency union: The role of central bank collateral policy," Working papers 554, Banque de France.
    10. Thomas Brand & Fabien Tripier, 2014. "Risk shocks and divergence between the Euro area and the US," Working Papers 2014-11, CEPII research center.
    11. Andrea Zaghini, 2017. "The CSPP at work: yield heterogeneity and the portfolio rebalancing channel," Temi di discussione (Economic working papers) 1157, Bank of Italy, Economic Research and International Relations Area.
    12. Sahuc, Jean-Guillaume, 2016. "The ECB’s asset purchase programme: A model-based evaluation," Economics Letters, Elsevier, vol. 145(C), pages 136-140.
    13. Aykut Ekinci, 2016. "The Effect of Credit and Market Risk on Bank Performance: Evidence from Turkey," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 427-434.
    14. Anamaria Illes & Marco Lombardi & Paul Mizen, 2015. "Why Did Bank Lending Rates Diverge from Policy Rates After the Financial Crisis?," Discussion Papers 2015/05, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    15. C. Cahn & J. Matheron & J-G. Sahuc, 2014. "Assessing the macroeconomic effects of LTROS," Working papers 528, Banque de France.
    16. Monica Billio & Roberto Casarin & Francesco Ravazzolo & Herman K. Van Dijk, 2016. "Interconnections Between Eurozone and us Booms and Busts Using a Bayesian Panel Markov‐Switching VAR Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1352-1370, November.
    17. Schock, Matthias, 2015. "Predicting Economic Activity via Eurozone Yield Spreads: Impact of Credit Risk," Hannover Economic Papers (HEP) dp-542, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    18. Zaghini, Andrea, 2017. "A tale of fragmentation: Corporate funding in the euro-area bond market," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 59-68.
    19. repec:dau:papers:123456789/15030 is not listed on IDEAS
    20. Schock, Matthias, 2014. "Do Eurozone yield spreads predict recessions?," Hannover Economic Papers (HEP) dp-532, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    21. repec:ibn:ijefaa:v:9:y:2017:i:9:p:175-181 is not listed on IDEAS
    22. Mazet-Sonilhac, C. & Mésonnier, J.-S., 2016. "Le coût des capitaux propres des grandes entreprises non financières en zone euro : une évaluation sur la dernière décennie," Bulletin de la Banque de France, Banque de France, issue 207, pages 33-45.

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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