Credit Risk Contagion before and during the Euro Area Sovereign Debt Crisis: Evidence from Central Europe

Abstract

We examine whether sovereign credit risk shocks emanating from the GIIPS countries had an effect on central European countries such as the Czech Republic, Hungary, Poland and Slovakia (the Visegrad group). In addition to the GIIPS and Visegrad group countries we als include Austria, France and Germany as control countries in our dataset. We analyse 30-minute intraday credit default swaps (CDS) data prior to the crisis period (2008-Oct. 2009) and during the crisis period (Oct. 2009-2011) which enables us to analyse changes in the dynamics of sovereign risk contagion between these two datasets. By using a panel VAR methodology we find rather comovement effects in the Visegrad group countries as they have been only marginally affected by the turmoil in the peripheral countries during the sovereign debt crisis. In contrast, we find strong contagion effects between the GIIPS countries in our sample. In addition, we study the effects of the four economic adjustment programmes by the Troika in the period from 2010 until 2011. Even though these bailouts have been essential for the GIIPS countries in terms of reducing contagion risk across the euro area, our analysis shows, that they did not have an effect for the Visegrad group countries.