## 8. Regimes of High and Low Sovereign Spreads

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---

### Introduction
- In the third week of July 2007 the yield on the 10-year Irish sovereign bond was lower than the yield on a comparable German sovereign bond. By the last week of January 2009, the Irish sovereign bonds paid about 260 basis points more than the German bond.
- Spreads are the market’s measure of a country’s risk of default. While perceived probability of default remained relatively low even at elevated spreads, markets judged higher risk premia warranted and more so for some countries.
- Prior to mid-July 2007, spreads among eurozone members moved in a narrow range with modest differentiation. The paper documents a transition from a benign equilibrium to a new, more stressed equilibrium.
- Key thesis: once global financial stress crossed a threshold (around the Bear Stearns rescue in March 2008), domestic financial sector vulnerability played an increasingly central role in sovereign spread dynamics. After Lehman Brothers’ failure, differentiation by public debt-to-GDP levels also became important.
- Nationalization of Anglo Irish on January 15, 2009 is identified as a pivotal event: in the following two weeks sovereign spreads throughout the eurozone jumped, emphasizing differentiation by financial sector vulnerability and public debt levels.

### Data and Econometric Approach
- Sample: weekly (and monthly robustness checks) data from January 2006 through January 2009 for 10 eurozone countries: Austria, Belgium, Netherlands, Finland, France, Greece, Ireland, Italy, Portugal, and Spain. Germany treated as the numeraire (Bund).
- Financial-sector prospect measure (F_it): ratio of the financial sector equity index to the overall equity index. A fall in F_it indicates market expects the financial sector to underperform the rest of the economy. Example: Irish F_it normalized to 100 in the first week of January 2006 was down to below 15 in the last week of January 2009.
- Sovereign spread S_it: difference between secondary-market yield on country’s 10-year bond and the German 10-year Bund.
- Estimation: first-difference panel specification explaining ΔS_it with lags of ΔS, lags of ΔF, contemporaneous ΔBund yield (B_t) to capture flight to quality, global risk proxies (Z_t), period dummy variables for crisis phases, country dummies (except where debt interactions are used), allowance for heteroskedasticity, first-order autocorrelation, and contemporaneous cross-country correlation of errors.
- Crisis phase dummies:
  - D1 = 1 between week of December 12, 2005 and July 13, 2007.
  - D2 = 1 between week of July 20, 2007 and March 7, 2008.
  - D3 = 1 between week of March 14, 2008 and May 16, 2008.
  - D4 = 1 between week of May 23, 2008 and September 5, 2008.
  - D5 = 1 between week of September 12, 2008 and beyond.

### Domestic finance matters: main empirical findings
- Before July 2007, weekly changes in spreads were essentially random. After the onset of the subprime crisis and through the Bear Stearns rescue, movement in spreads reflected global factors (flight to quality and global financial sector instability).
- After the Bear Stearns rescue (March 2008), global factors became less relevant and domestic financial sector prospects acquired a more prominent role in explaining changes in sovereign spreads.
- Lags matter: financial sector weakness tends to lead sovereign spread increases with a delay of a few weeks. Contemporary effect of ΔF is generally insignificant; lagged effects (previous one to three weeks) are statistically significant.
- Post-Lehman phase is associated with a general increase in sovereign spreads of about 4 basis points a week (reported as "about 4 basis points a week" in exploratory results and shown as Post Lehman coefficient 4.46*** in Table 2).
- Global factors identified:
  - Flight to quality: fall in German Bund yield associated with rise in spreads (negative coefficient on ΔBund-10y). Example coefficients: Δ.Bund-10y coefficient reported as -5.46** in Table 3 (column 1).
  - Global financial sector stress: changes in CDS spreads of U.S. banks matter. Lagged change LΔ.CDS_US_Banks positive and significant in many specifications (e.g., LΔ.CDS_US_Banks coefficient 0.02** in Table 3).
- Robustness checks: adding U.K. financial-sector F-index does not substitute for country-specific F_it effects; VIX does not provide a clear consistent link.

### Crisis phases and timing
- Phase 1 (Subprime onset to Bear Stearns rescue, mid-July 2007–mid-March 2008):
  - Variation in spreads related mainly to global factors (flight to quality and U.S. banks’ CDS). Minimally differentiated across countries.
- Post-Bear Stearns (March 2008 onward):
  - Influence of identifiable global factors declined in magnitude.
  - Domestic financial-sector prospects became the primary source of cross-country differentiation in spreads.
  - Bear Stearns rescue created an explicit link between financial institutions and public finances; initially produced a brief fall in spreads, followed by renewed increase by mid-May 2008.
- Post-Anglo Irish nationalization (Anglo Irish nationalized late evening January 15, 2009):
  - Immediate market reaction: Allied Irish Banks and Bank of Ireland share prices fell by 12.9 and 13.3 percent respectively on Friday morning after nationalization.
  - Irish F-index: rose from 21 (week starting December 26, 2008) to 24 (week starting January 9, 2009), then fell back to 21 (week starting January 16), associated with an Irish sovereign spread jump of 32 basis points (from average 142), and then F-index dived to 14 (week starting January 23) with sovereign spreads rising to 260 basis points (an 80 basis point rise that week).
  - Across the other nine sample countries, average F-index was 77 after Christmas; a 2-point fall in week starting January 16 associated with a 16 basis point jump in spreads (from 95 to 111), then further fall of 3 points associated with rising to 123 basis points.
  - In last two weeks of January 2009 markets shifted from responding to changes in F-index to responding to the level of F-index; a post-Anglo Irish dummy interacted with F-index is highly significant (interaction negative and significant), implying countries with lower F-index experienced larger spread increases in those two weeks.
  - Interaction of post-Anglo Irish dummy with public debt-to-GDP ratio is positive (column 3 Table 5) implying higher-debt countries experienced more rapid increase in spreads in those two weeks (though significance varies with sample).

### Country differences and role of competitiveness
- Grouping by real effective exchange rate appreciation from January 2003 to July 2008 as proxy for loss of competitiveness:
  - "Large Appreciation" (largest loss of competitiveness): Ireland, Spain, Greece, Belgium.
  - "Moderate Appreciation": Belgium, Italy, France, Netherlands.
  - "Low Appreciation": France, Netherlands, Finland, Austria.
- Post-Bear Stearns:
  - Countries with largest loss in competitiveness show the strongest link between domestic financial sector weakness and sovereign spread increases. The summed short-term and long-term impacts of F-index on spreads decline as the competitive position improves across groups.
  - Finland exhibits a weaker relationship consistent with smaller signs of overheating and different composition of equity indices (Nokia effect).
- Role of public debt:
  - Public debt-to-GDP ratios differentiate levels of spreads and, increasingly over time, the rate of spread increase. Figure 4 shows debt ratios differentiate sovereign spreads and this differentiation accelerated during the crisis.
  - Regression evidence (Tables 9 and 10) indicates that interaction terms of post-Lehman dummy and debt-to-GDP ratio become strongly significant for countries with large and moderate competitiveness loss: the post-Lehman period amplified the penalty for higher debt where competitiveness had eroded.
  - Examples: Lehman*Debt_GDP coefficient is 0.07*** in Table 9 (column 1) for the Ireland/Greece/Spain/Belgium group, and 0.08*** in Table 9 (column 2) for the Belgium/Italy/France/Netherlands group; effects are muted for low-appreciation group.

### Interpreting the findings: financial accelerator and growth links
- Reinhart and Rogoff (2008) evidence leveraged: banking crises are followed by large increases in public debt ratios, mainly due to growth slowdowns rather than bailout costs alone.
- Timeline of growth forecast revisions: consensus forecasts for eurozone 2009 growth were steadily marked down from early 2008 and precipitously after Lehman in September 2008 (Figure 5). This deterioration magnified the fiscal cost concerns of bailouts and strengthened link between financial fragility and sovereign spreads.
- F-index tracks forward-looking growth indicators: change in F-index during 2008 correlates with revisions to 2009 growth forecasts; Ireland showed the largest F-index decline and the largest revision to growth forecasts, Finland the opposite (Figure 6).
- Sovereign spreads are negatively associated with contemporaneous/forward growth projections (Figure 7): higher spreads associated with lower projected growth.
- Proposed feedback mechanism (financial accelerator-type):
  - Weaker financial sector → wider sovereign spreads (northeast quadrant).
  - Weaker financial sector → lower growth (southwest quadrant).
  - Wider sovereign spreads → lower growth (northwest quadrant).
  - These links can reinforce each other and shift the economy from a low-spread, healthy-growth equilibrium to a high-spread, fragile-growth equilibrium with persistent higher public debt ratios.

### Conclusions and policy implications
- Summary of empirical chronology:
  - Pre-crisis (pre-July 2007): compressed spreads, short-term movements essentially random.
  - Subprime onset to Bear Stearns: global factors (flight-to-quality and U.S. banks’ CDS) drove spread increases with limited cross-country differentiation.
  - Post-Bear Stearns: domestic financial-sector prospects became a principal determinant of sovereign spread differentiation.
  - Post-Lehman: generalized increase in risk premia and intensified differentiation by loss of competitiveness and public debt levels.
- Policy challenge: immediate priority is dealing with financial sector fragility. This is independent of—but complementary to—longer-term efforts to restore external competitiveness.
- Markets’ disciplinary role: markets did not discipline prior euphoria but, once fragilities became evident, reacted to reveal underlying vulnerabilities and now exert pressure on governments to improve public finances and restore competitiveness. How long pressures last and whether they elicit necessary policy responses remains open.
- Specific policy emphasis from the analysis:
  - Direct efforts to stabilize and repair the financial sector are essential to prevent a persistent shift to a high-spread, low-growth equilibrium.
  - Restoring competitiveness is important for medium-term debt dynamics but is a longer-term process and alone will not immediately resolve financial fragility or high risk premia.

### Key statistics and illustrative numerical findings
- Irish sovereign spread vs German Bund: about 260 basis points more than the German bond (last week of January 2009).
- 100 basis points equal one percentage point.
- Irish F-index normalized to 100 in the first week of January 2006 was down to below 15 in the last week of January 2009.
- Post-Lehman associated with a general increase in sovereign bond spreads of about 4 basis points a week (Table 2 Post Lehman = 4.46*** reported).
- Anglo Irish nationalization: late on the evening of Thursday, January 15, 2009.
- Allied Irish Banks and the Bank of Ireland share prices fell sharply by 12.9 and 13.3 percent respectively (Friday morning after nationalization).
- Irish weekly spread dynamics around nationalization:
  - F-index rose from 21 (week starting December 26, 2008) to 24 (week starting January 9, 2009); then fell back to 21 (week starting January 16) with Irish sovereign spreads jumping by sizeable 32 basis points (almost 20 percent over the previous week’s average of 142 basis points); week starting January 23 F-index dived to 14 and sovereign spreads rose 80 basis points to 260 basis points (almost 50 percent over previous week’s average).
- Average for all countries’ weekly change in spreads over the entire time period reported in Table 1: 0.60 (basis points).
- Selected regression coefficients:
  - Table 3 (column 1): Δ.Bund-10y coefficient = -5.46**; LΔ.CDS_US_Banks coefficient = 0.02**; LΔ.F and higher lags significant negative (L2Δ.F = -0.25***; L3Δ.F = -0.19***).
  - Table 2 (column 5): sum of lagged F effects strong (example entries LΔ.S, L2Δ.S, lagged F coefficients and Post Lehman = 4.46***).
  - Table 5 (column 1): Dummy for Post-Anglo Irish = 51.01***; F*Post-Anglo Irish interaction = -0.51***.
  - Table 9 (column 1): Lehman*Debt_GDP = 0.07*** for large-appreciation group.
  - Table 10 (monthly): Lehman*Debt_GDP = 0.17*** (Ireland/Greece/Spain/Belgium group) and 0.23*** (Belgium/Italy/France/Netherlands group).
- Figures referenced: Figure 1 (trends and dispersion of eurozone sovereign spreads), Figure 2 (sovereign spreads vs F-index), Figure 3 (real effective exchange rate appreciation Jan 2003–Jul 2008), Figure 4 (correlation between debt-to-GDP and spreads), Figure 5 (evolving 2009 growth consensus forecasts), Figure 6 (change in growth projections vs F-ratio change during 2008), Figure 7 (sovereign spreads and GDP growth), Figure 8 (schematic regimes of low/high sovereign spreads and reinforcing feedbacks).

*Source: IMF Working Paper chapter "8. Regimes of High and Low Sovereign Spreads" (content unit _wp09108, January 2006–January 2009 analysis).*

### References..............................................................................................................

### References

### Tables
- 1. Weekly Changes in Spreads (basis points) ..................................................................21
- 2. Does Domestic Finance Matter? ..................................................................................22
- 3. Domestic Finance Does Matter....................................................................................23
- 4. Phases of the Crisis ......................................................................................................24
- 5. Explaining the Jump in Spreads After the Anglo Irish Nationalization ......................25
- 6. Phases as Seen Through Monthly Changes in Spreads ...............................................26
- 7. Subprime to Bear Stearns: Limited Differentiation Across Countries ........................27
- 8. Post Bear Stearns: Country Differentiation By Loss of Competitiveness ...................28
- 9. The Role of Public Debt ..............................................................................................29
- 10. Post-Bear Stearns Country Variations: Monthly Data.................................................30

### Figures
- 1. Trends and Dispersion of Eurozone Sovereign Spreads..............................................31
- 2. Sovereign Spreads and Prospects of the Financial Sector ...........................................32
- 3. Real Effective Exchange Rate Appreciation from January 2003 to July 2008............33
- 4.         Correlation         Between         Debt-to-GDP         Ratio and Sovereign Spreads ..............................34
- 5. Eurozone: Evolving Real GDP Consensus Forecasts for 2009 ...................................35
- 6. Change in Growth Projections for 2009 as F-Ratio Changed During 2008 ................36
- 7. Do Sovereign Spreads Anticipate GDP Growth? ........................................................37

*Source: _wp09108 - References.*

### 8. Regimes of High and Low Sovereign Spreads ............................................................38

### 8. Regimes of High and Low Sovereign Spreads

### Introduction
- In the third week of July 2007 the yield on the 10-year Irish sovereign bond was lower than the yield on a comparable German sovereign bond. By the last week of January 2009, the Irish sovereign bonds paid about 260 basis points more than the German bond.
- Spreads are the market’s measure of a country’s risk of default. While perceived probability of default remained relatively low even at elevated spreads, markets judged higher risk premia warranted and more so for some countries.
- Prior to mid-July 2007, spreads among eurozone members moved in a narrow range with modest differentiation. The paper documents a transition from a benign equilibrium to a new, more stressed equilibrium.
- Key thesis: once global financial stress crossed a threshold (around the Bear Stearns rescue in March 2008), domestic financial sector vulnerability played an increasingly central role in sovereign spread dynamics. After Lehman Brothers’ failure, differentiation by public debt-to-GDP levels also became important.
- Nationalization of Anglo Irish on January 15, 2009 is identified as a pivotal event: in the following two weeks sovereign spreads throughout the eurozone jumped, emphasizing differentiation by financial sector vulnerability and public debt levels.

### Data and Econometric Approach
- Sample: weekly (and monthly robustness checks) data from January 2006 through January 2009 for 10 eurozone countries: Austria, Belgium, Netherlands, Finland, France, Greece, Ireland, Italy, Portugal, and Spain. Germany treated as the numeraire (Bund).
- Financial-sector prospect measure (F_it): ratio of the financial sector equity index to the overall equity index. A fall in F_it indicates market expects the financial sector to underperform the rest of the economy. Example: Irish F_it normalized to 100 in first week of January 2006 was down to below 15 in the last week of January 2009.
- Sovereign spread S_it: difference between secondary-market yield on country’s 10-year bond and the German 10-year Bund.
- Estimation: first-difference panel specification explaining ΔS_it with lags of ΔS, lags of ΔF, contemporaneous ΔBund yield (B_t) to capture flight to quality, global risk proxies (Z_t), period dummy variables for crisis phases, country dummies (except where debt interactions are used), allowance for heteroskedasticity, first-order autocorrelation, and contemporaneous cross-country correlation of errors.
- Crisis phase dummies:
  - D1 = 1 between week of December 12, 2005 and July 13, 2007.
  - D2 = 1 between week of July 20, 2007 and March 7, 2008.
  - D3 = 1 between week of March 14, 2008 and May 16, 2008.
  - D4 = 1 between week of May 23, 2008 and September 5, 2008.
  - D5 = 1 between week of September 12, 2008 and beyond.

### Domestic finance matters: main empirical findings
- Before July 2007, weekly changes in spreads were essentially random. After the onset of the subprime crisis and through the Bear Stearns rescue, movement in spreads reflected global factors (flight to quality and global financial sector instability).
- After the Bear Stearns rescue (March 2008), global factors became less relevant and domestic financial sector prospects acquired a more prominent role in explaining changes in sovereign spreads.
- Lags matter: financial sector weakness tends to lead sovereign spread increases with a delay of a few weeks. Contemporary effect of ΔF is generally insignificant; lagged effects (previous one to three weeks) are statistically significant.
- Post-Lehman phase is associated with a general increase in sovereign spreads of about 4.46 basis points a week (reported as "about 4 basis points a week" in exploratory results and shown as Post Lehman coefficient 4.46*** in Table 2).
- Global factors identified:
  - Flight to quality: fall in German Bund yield associated with rise in spreads (negative coefficient on ΔBund-10y). Example coefficients: Δ.Bund-10y coefficient reported as -5.46** in Table 3 (column 1) indicating contemporaneous Bund movement matters.
  - Global financial sector stress: changes in CDS spreads of U.S. banks matter. Lagged change LΔ.CDS_US_Banks positive and significant in many specifications (e.g., LΔ.CDS_US_Banks coefficient 0.02** in Table 3).
- Robustness checks: adding U.K. financial-sector F-index does not substitute for country-specific F_it effects; VIX does not provide a clear consistent link.

### Crisis phases and timing
- Phase 1 (Subprime onset to Bear Stearns rescue, mid-July 2007–mid-March 2008):
  - Variation in spreads related mainly to global factors (flight to quality and U.S. banks’ CDS). Minimally differentiated across countries.
- Post-Bear Stearns (March 2008 onward):
  - Influence of identifiable global factors declined in magnitude.
  - Domestic financial-sector prospects became the primary source of cross-country differentiation in spreads.
  - Bear Stearns rescue created an explicit link between financial institutions and public finances; initially produced a brief fall in spreads, followed by renewed increase by mid-May 2008.
- Post-Anglo Irish nationalization (Anglo Irish nationalized late evening January 15, 2009):
  - Immediate market reaction: Allied Irish Banks and Bank of Ireland share prices fell by 12.9 and 13.3 percent respectively on Friday morning after nationalization.
  - Irish F-index: rose from 21 (week starting December 26, 2008) to 24 (week starting January 9, 2009), then fell back to 21 (week starting January 16), associated with an Irish sovereign spread jump of 32 basis points (from average 142), and then F-index dived to 14 (week starting January 23) with sovereign spreads rising to 260 basis points (an 80 basis point rise that week).
  - Across the other nine sample countries, average F-index was 77 after Christmas; a 2-point fall in week starting January 16 associated with a 16 basis point jump in spreads (from 95 to 111), then further fall of 3 points associated with rising to 123 basis points.
  - In last two weeks of January 2009 markets shifted from responding to changes in F-index to responding to the level of F-index; a post-Anglo Irish dummy interacted with F-index is highly significant (interaction negative and significant), implying countries with lower F-index experienced larger spread increases in those two weeks.
  - Interaction of post-Anglo Irish dummy with public debt-to-GDP ratio is positive (column 3 Table 5) implying higher-debt countries experienced more rapid increase in spreads in those two weeks (though significance varies with sample).

### Country differences and role of competitiveness
- Grouping by real effective exchange rate appreciation from January 2003 to July 2008 as proxy for loss of competitiveness:
  - "Large Appreciation" (largest loss of competitiveness): Ireland, Spain, Greece, Belgium.
  - "Moderate Appreciation": Belgium, Italy, France, Netherlands.
  - "Low Appreciation": France, Netherlands, Finland, Austria.
- Post-Bear Stearns:
  - Countries with largest loss in competitiveness show the strongest link between domestic financial sector weakness and sovereign spread increases. The summed short-term and long-term impacts of F-index on spreads decline as the competitive position improves across groups.
  - Finland exhibits a weaker relationship consistent with smaller signs of overheating and different composition of equity indices (Nokia effect).
- Role of public debt:
  - Public debt-to-GDP ratios differentiate levels of spreads and, increasingly over time, the rate of spread increase. Figure 4 shows debt ratios differentiate sovereign spreads and this differentiation accelerated during the crisis.
  - Regression evidence (Tables 9 and 10) indicates that interaction terms of post-Lehman dummy and debt-to-GDP ratio become strongly significant for countries with large and moderate competitiveness loss: the post-Lehman period amplified the penalty for higher debt where competitiveness had eroded.
  - Examples: Lehman*Debt_GDP coefficient is 0.07*** in Table 9 (column 1) for the Ireland/Greece/Spain/Belgium group, and 0.08*** in Table 9 (column 2) for the Belgium/Italy/France/Netherlands group; effects are muted for low-appreciation group.

### Interpreting the findings: financial accelerator and growth links
- Reinhart and Rogoff (2008) evidence leveraged: banking crises are followed by large increases in public debt ratios, mainly due to growth slowdowns rather than bailout costs alone.
- Timeline of growth forecast revisions: consensus forecasts for eurozone 2009 growth were steadily marked down from early 2008 and precipitously after Lehman in September 2008 (Figure 5). This deterioration magnified the fiscal cost concerns of bailouts and strengthened link between financial fragility and sovereign spreads.
- F-index tracks forward-looking growth indicators: change in F-index during 2008 correlates with revisions to 2009 growth forecasts; Ireland showed the largest F-index decline and the largest revision to growth forecasts, Finland the opposite (Figure 6).
- Sovereign spreads are negatively associated with contemporaneous/forward growth projections (Figure 7): higher spreads associated with lower projected growth.
- Proposed feedback mechanism (financial accelerator-type):
  - Weaker financial sector → wider sovereign spreads (northeast quadrant).
  - Weaker financial sector → lower growth (southwest quadrant).
  - Wider sovereign spreads → lower growth (northwest quadrant).
  - These links can reinforce each other and shift the economy from a low-spread, healthy-growth equilibrium to a high-spread, fragile-growth equilibrium with persistent higher public debt ratios.

### Conclusions and policy implications
- Summary of empirical chronology:
  - Pre-crisis (pre-July 2007): compressed spreads, short-term movements essentially random.
  - Subprime onset to Bear Stearns: global factors (flight-to-quality and U.S. banks’ CDS) drove spread increases with limited cross-country differentiation.
  - Post-Bear Stearns: domestic financial-sector prospects became a principal determinant of sovereign spread differentiation.
  - Post-Lehman: generalized increase in risk premia and intensified differentiation by loss of competitiveness and public debt levels.
- Policy challenge: immediate priority is dealing with financial sector fragility. This is independent of—but complementary to—longer-term efforts to restore external competitiveness.
- Markets’ disciplinary role: markets did not discipline prior euphoria but, once fragilities became evident, reacted to reveal underlying vulnerabilities and now exert pressure on governments to improve public finances and restore competitiveness. How long pressures last and whether they elicit necessary policy responses remains open.
- Specific policy emphasis from the analysis:
  - Direct efforts to stabilize and repair the financial sector are essential to prevent a persistent shift to a high-spread, low-growth equilibrium.
  - Restoring competitiveness is important for medium-term debt dynamics but is a longer-term process and alone will not immediately resolve financial fragility or high risk premia.

### Key statistics and illustrative numerical findings (preserved exactly as in source)
- Irish sovereign spread vs German Bund: about 260 basis points more than the German bond (last week of January 2009).
- 100 basis points equal one percentage point.
- Irish F-index normalized to 100 in the first week of January 2006 was down to below 15 in the last week of January 2009.
- Post-Lehman associated with a general increase in sovereign bond spreads of about 4 basis points a week (Table 2 Post Lehman = 4.46*** reported).
- Anglo Irish nationalization: late on the evening of Thursday, January 15, 2009.
- Allied Irish Banks and the Bank of Ireland share prices fell sharply by 12.9 and 13.3 percent respectively (Friday morning after nationalization).
- Irish weekly spread dynamics around nationalization:
  - F-index rose from 21 (week starting December 26, 2008) to 24 (week starting January 9, 2009); then fell back to 21 (week starting January 16) with Irish sovereign spreads jumping by sizeable 32 basis points (almost 20 percent over the previous week’s average of 142 basis points); week starting January 23 F-index dived to 14 and sovereign spreads rose 80 basis points to 260 basis points (almost 50 percent over previous week’s average).
- Average for all countries’ weekly change in spreads over the entire time period reported in Table 1: 0.60 (basis points).
- Selected regression coefficients (preserved from tables illustrating magnitudes and significance):
  - Table 3 (column 1): Δ.Bund-10y coefficient = -5.46**; LΔ.CDS_US_Banks coefficient = 0.02**; LΔ.F and higher lags significant negative (L2Δ.F = -0.25***; L3Δ.F = -0.19***).
  - Table 2 (column 5): sum of lagged F effects strong (example entries LΔ.S, L2Δ.S, lagged F coefficients and Post Lehman = 4.46***).
  - Table 5 (column 1): Dummy for Post-Anglo Irish = 51.01***; F*Post-Anglo Irish interaction = -0.51*** (post-Anglo Irish dummy interacted with level of F-index).
  - Table 9 (column 1): Lehman*Debt_GDP = 0.07*** for large-appreciation group.
  - Table 10 (columns for monthly post-Bear Stearns): Lehman*Debt_GDP = 0.17*** (Ireland/Greece/Spain/Belgium group) and 0.23*** (Belgium/Italy/France/Netherlands group).
- Figures referenced: Figure 1 (trends and dispersion of eurozone sovereign spreads), Figure 2 (sovereign spreads vs F-index), Figure 3 (real effective exchange rate appreciation Jan 2003–Jul 2008), Figure 4 (correlation between debt-to-GDP and spreads), Figure 5 (evolving 2009 growth consensus forecasts), Figure 6 (change in growth projections vs F-ratio change during 2008), Figure 7 (sovereign spreads and GDP growth), Figure 8 (schematic regimes of low/high sovereign spreads and reinforcing feedbacks).

*Source: IMF Working Paper chapter "8. Regimes of High and Low Sovereign Spreads" (content unit _wp09108, January 2006–January 2009 analysis).*

### REFERENCES

### REFERENCES

### Cited works

- Ahrend, Rudiger, Boris Cournède and Robert Price, 2008, “Monetary policy, market excesses and financial turmoil,” Economics Department Working Paper No. 597, Organisation for Economic Co-operation and Development, Paris.  
- Beck, Nathaniel and Jonathan N. Katz, 1995, “What to do (and not to do) with Time-Series Cross-Section Data,” The American Political Science Review 89(3): 634-647.  
- Buiter, Willem, 2009, “Sovereign default in the eurozone and the breakup of the eurozone: Sloppy Thinking 101,” Financial Times, January 14, http://blogs.ft.com/maverecon/2009/01/sovereign-default-in-the-eurozone-and-the-breakup-of-the-eurozone-sloppy-thinking-101/.  
- Codogno, Lorenzo, Carlo Favero, Alessandro Missale, 2003, “Yield Spreads on EMU Government Bonds,” Economic Policy 18(37): 503-532.  
- Eichengreen, Barry, and Ashoka Mody, 1998, “Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?” International Finance 1(1): 35-57.  
- Eichengreen, Barry, and Ashoka Mody, Milan Nedeljkovic, and Lucio Sarno, 2009, “How the Subprime Crisis Went Global: Evidence from Bank Credit Default Swap Spreads,” NBER Working Paper 14904.  
- International Monetary Fund, 2008, World Economic Outlook, October, Washington, D.C.  
- Leamer, Edward, 2009, Macroeconomic Patterns and Stories: A Guide for MBAs, Springer.  
- Mody, Ashoka and Mark Taylor, 2003, “The High Yield Spread as a Predictor of Real Economic Activity: Evidence of a Financial Accelerator for the United States,” IMF Staff Papers 50(3): 373-402.  
- Pagano, Marco and Ernst-Ludwig von Thadden, 2004, “The European Bond Markets Under EMU,” Oxford Review of Economic Policy 20(4): 531-554.  
- Reinhart Carmen M. and Kenneth S. Rogoff, 2008, Banking Crises: An Equal Opportunity Menace. www.economics.harvard.edu/faculty/rogoff/files/Banking_Crises.pdf.

*Source: _wp09108 - REFERENCES*

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