Sovereign Default Risk and Bank Fragility in Financially Integrated Economies

An update on EMU sovereign yield spread drivers in times of crisis: A panel data analysis

“…Besides, whilst foreign banks' claims on the private (non-financial) sector are significant in the two groups of countries, foreign claims on the banking and public sectors are only significant in one group of countries: in central and peripheral countries respectively (see Tables 2 and 3). These results are in line with the recent literature which outlines that, in an scenario of increased international financial activity in the euro area 19 , not only public finances imbalances are key determinants of the probability that the sovereign debt crisis could spill over from one country to another, but that transmission of the crisis through the banking system may have also been a major issue [see Bolton and Jeanne (2011) or Allen et al (2011), among others]. Moreover, Table 3 shows that the level of indebtedness in the banking sector is also significant driver of sovereign risk premium in peripheral countries which highlights the interconnection between private and public debt (see Acharya et al, 2014) 20 and thus, between banking and sovereign crises in southern countries.…”

“…Similar arguments can be found in other recent studies using data that extend beyond the crisis period [see, among others, Palladini andPortes (2011), Beirne andFratzscher (2013) or Aizenman et al, (2013)]. Besides, many authors have stressed the importance of other fundamental variables beyond the country's fiscal position to explain yield spread behaviour after the outbreak of the crisis [Mody (2009), Barrios et al (2009), the IMF (2010), Bolton and Jeanne (2011), Allen et al (2011) and Acharya et al (2014), to name a few]. In addition, comparing these findings to the ones with data samples ending before the crisis period provides evidence of potential in-sample changes in the specification of the spreads.…”

“…Finally, according to certain authors [Bolton and Jeanne (2011) and Allen et al (2011), among them], in a scenario of increased international financial activity in the euro area, not only are public finance imbalances key determinants of the probability that the sovereign debt crisis could spill over from one country to another, but the transmission of the crisis through the banking system may also be a major issue. As a result, in our analysis we also include variables that capture the important cross-border banking system linkages in euro area countries.…”

Modelling Monetary and Fiscal Governance in the Wake of the Sovereign Debt Crisis in Europe

“…In addition, there is some economic literature on sovereign default decisions [15][16][17][18]. Aguiar and Gopinath [19], JungJae [20] and Arellano [21] even study sovereign default issues in dynamic quantitative frameworks.…”

Debt Sustainability and Financial Crises in South Africa

“…However, Cottarelli et al (2010) argue that determining the optimal level of indebtedness for the economy is not an easy task given that debt-related vulnerabilities are not homogeneous across countries. Thus the debt sustainability assessment program of the World Bank and the International Monetary Fund classifies countries into different categories using indicative thresholds for debt burden based on these countries' policy performance, while Bolton and Jeanne (2011) and Gros (2011) cite weak fiscal and monetary policies and institutions as important indicators of sustainability of sovereign debt. The essential ingredient of debt sustainability is solvency or the ability of a country to service its debt in the long run.…”