Working Paper: CEPR ID: DP8661
Authors: Balint Horvath; Harry Huizinga
Abstract: 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.
Keywords: bailout; banking; CDS spreads; sovereign debt
JEL Codes: G21; G28; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank exposure to PIIGS countries (F65) | Bank stock excess returns (G17) |
| Government debt-to-GDP ratios (H63) | Bank stock excess returns (G17) |
| Bank exposure to PIIGS countries (F65) | Bank CDS spreads (G21) |
| Non-PIIGS euro zone sovereign exposures (F34) | Bank CDS spreads (G21) |
| EFSF announcement (E60) | Bank stock excess returns (G17) |
| EFSF announcement (E60) | Bank CDS spreads (G21) |
| EFSF announcement (E60) | Sovereign debt value (H63) |