## Euro Area Sovereign Risk During the Crisis

_IMF Working Papers, October 1, 2009_

## Source details

**Canonical URL:** [Euro Area Sovereign Risk During the Crisis](https://www.imf.org/en/publications/wp/issues/2016/12/31/euro-area-sovereign-risk-during-the-crisis-23325)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/31/euro-area-sovereign-risk-during-the-crisis-23325/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/31/euro-area-sovereign-risk-during-the-crisis-23325/index.json)
- [Bundle manifest](/en/publications/wp/issues/2016/12/31/euro-area-sovereign-risk-during-the-crisis-23325/bundle-manifest.json)

## Bibliographic details
- Authors: Edda Zoli, Silvia Sgherri
- Published: October 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451873696.001

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### Summary
- While the use of public resources is critical to cushion the impact of the financial crisis on the euro-area economy, it is key that the entailed fiscal costs not be seen by markets as undermining fiscal sustainability.
- The paper asks: to what extent do movements in euro area sovereign spreads reflect country-specific solvency concerns?
- The paper suggests that euro area sovereign risk premium differentials tend to comove over time and are mainly driven by a common time-varying factor, mimicking global risk repricing.
- Since October 2008, there is evidence that markets have become progressively more concerned about the potential fiscal implications of national financial sectors' frailty and future debt dynamics.
- The liquidity of sovereign bond markets still seems to play a significant (albeit fairly limited) role in explaining changes in euro area spreads.

### Key Findings and Evidence
- Euro area sovereign risk premium differentials tend to comove over time.
- A common time-varying factor is the main driver of sovereign spread differentials, consistent with global risk repricing.
- From October 2008 onward, market concerns about fiscal implications of national financial sector frailty and future debt dynamics have increased.
- Sovereign bond market liquidity plays a significant but fairly limited role in explaining changes in euro area spreads.

### Subjects and Keywords
- Subjects: Financial crises, Financial sector, Return on investment, Securities markets, Sovereign bonds
- Keywords: bond market, financial market, sovereign bond, WP

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## Content in this bundle

- **1. Explaining Common Factor’s Dynamics**
  - [1. Explaining Common Factor’s Dynamics (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09222.pdf.md){rel="alternate" type="text/markdown"}
  - [1. Explaining Common Factor’s Dynamics (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09222.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/euro-area-sovereign-risk-during-the-crisis-23325_