European Sovereign Debt Research Articles

Assessing the Impact of the ECB’s Unconventional Monetary Policy on the European Stock Markets

This study assesses the effects of the European Central Bank’s (ECB) unconventional monetary policy (UMP) on the prices of selected European stock market indices during the European sovereign debt (2010–2012) and the COVID-19 pandemic (2020–2022) crises interventions. This research employs the instrumental variables (IV) two-stage least squares (2SLS) model approach to evaluate the effects of changes in the size of the ECB’s balance sheet on the pricing of key equity market indices in Europe. The results of this study suggest that the ECB’s asset value expansion had the opposite statistically significant effects on the European stock market indices’ prices between the interventions. That is, an increase in the ECB’s balance sheet size was associated with a decrease in the prices of the indices during the sovereign debt crisis and with a rise during the COVID-19 pandemic. This research pinpoints the price sensitivity of each of the European equity indices to the ECB’s UMP and determines the different outcomes of the ECB’s quantitative easing policy between the interventions.

The impact of financial tightening on firm productivity: Maturity matters

We analyse how the combination of firm-level financial fragility and country-level financial constraints affects productivity growth in France, Italy and Spain. We first show that, although high leverage weighs on firm-level productivity in all three countries, more leveraged firms seem to suffer more from financial constraints only in Italy. In a second step, we show that this apparent specificity of Italian firms is related to the relatively short maturity of their debt. These results highlight the importance of liquidity constraints during periods of financial stress such as the Global Financial Crisis of 2008 or the European sovereign debt and banking crisis of 2011-13.

Similarities between Stock Market Reactions During the 2007 Financial Crisis and the 2020-2021 Coronavirus Pandemic. Correlation and Cointegration Analyses

In light of two recent global economic shocks, the global financial crisis of 2007/08 and the COVID-19 pandemic, this paper analyzes the relationships between global shocks and the national stock markets, looking to trends in volatility for the leading stock indices in six CEE countries, namely Austria, Bulgaria, Czech Republic, Hungary, Poland, and Romania, and indices from Germany (DAX) and the United States (S&P 500). The selected indices include the largest domestic companies in each country and make up most of the domestic market capitalization. For the analysis we used Garman-Klass (GK) volatility estimator, as the volatility was considered the most important proxy for market uncertainty. Then we used a simple correlation matrix to show initial tendencies. Also, the Johansen's test was used to determine if the indices are cointegrated and if this relationship has changed significantly in the non-crisis periods. We analyze Granger causality and the network approach as proposed by Diebold and Yilmaz (2015). The GK volatility results were individualized in three periods: 2007-2011 as a proxy for the global financial crisis and European sovereign debt; 2012-2019 representing a period of economic recovery and ultimately 2020-2021 representing the data points for the COVID-19 global pandemic. We find that particularly during periods of global distress, correlations between patterns of volatility for the stock market indices from these countries increase, and they exhibit stronger patterns of cointegration. These findings highlight the increasing connectivity in global financial markets and added challenges in crafting portfolio diversification strategies based on geography of stock holdings.

Financial Stability as the Objective of the Banking Union

The European financial and sovereign debt crisis has fundamentally transformed the banking landscape in the European Union. In order to break the dependence between banks and sovereigns, the European legislator has created a Banking Union. The objective of these legislative measures is financial stability. How can this term be understood and what is the significance of financial stability for the Banking Union? This contribution aims to answer these questions

Detecting structural breaks in realized volatility

This paper considers the detection of structural changes in realized volatility based on HAR–GARCH models. For this, we propose a quasi-likelihood based score test for parameter changes in HAR–GARCH models. We derive the limiting null distribution of the score test by first introducing the quasi-maximum likelihood estimator to the HAR–GARCH model and establishing its asymptotic properties. The proposed test statistic is shown to converge weakly to a function of the Brownian bridge under the null of no structural change. Our simulations study shows reasonable sizes and powers of the test, even for non-Gaussian innovations. A real data application to S&P 500 realized volatility over the last 12 years coincides with three waves of financial crisis, namely the US housing, European sovereign debt, and emerging market crisis.

Transmission of Financial Crisis: Evidence of Sub-Sahara Africa (SSA)

The world was struck by a chain of financial crisis between 2006 and 2012. In 2007, began the subprime crisis which gave way to European debt crisis in 2010. As the world tried to recover in 2009, this European debt crisis and Greece sovereign debt (2011) set in. The study investigates through descriptive techniques, correlation and regression, evidence and openings through which these crisis reached and how it affected Sub-Sahara Africa. Using three indicators; GDP growth rate, export/GDP ratio and inflation, we found statistically evidence of the financial tumor in this continent. With numerous indicators of financial crisis we could limit ourselves to three because the data source provided us with more detail information. We suggested that African government multinational and local firms should have expert that can predict and mitigate the impact of a financial crisis.

Book Reviews

Ten papers explore the importance of emotions in the study and understanding of finance and money. Papers discuss magic thinking and panic buttons in the callous financial transaction chains (Helena Flam); immoral panic and emotional operations in times of financial fragility (Alexandros-Andreas Kyrtsis); how European sovereign debt became the new subprime—the role of confidence in the European financial crisis, 2009–10 (Richard Swedberg); shame and stock market losses—the case of amateur investors in the United States (Brooke Harrington); the grammar of trust (Susan Shapiro); revisiting the credit theory of money and trust (Geoffrey Ingham); methodology in Max Weber's economic sociology—what place emotions in Roman agrarian history and today's finance sector? (Sam Whimster); states of disorder—new reflections on sociology's contribution to understanding financial booms and crises (Shaun Wilson and Peter McCarthy); “nicotine for protein”—culture and the emotions of hard trading in Japanese prisoner of war camps (Benjamin Manning); and the emotions of money—assessing betrayal and reform (Jocelyn Pixley). Pixley is Professorial Research Fellow with the Global Policy Institute at London Metropolitan University and Honorary Senior Research Fellow in the Department of Sociology at Macquarie University.

European federal criminal law: What can Europe learn from the US system of federal criminal law to solve its sovereign debt crisis?

The lack of a strong law enforcement authority in the EU with competence in criminal matters that monitors how European funds are applied can be considered one of the main reasons behind the disastrous spending of EU member states. This paper contends that EU funds are to be treated as “federal” funds, and the mismanagement of those has to be prosecuted and punished by the EU itself. On top of longstanding arguments for the legitimacy of EU institutions to enforce criminal sanctions in order to protect its own funds, an additional rationale has become present in the outcome of the sovereign debt crisis. As many Law& Finance studies have shown, there is a close relationship between law enforcement capacity and investors’ confidence. Therefore, to restore investors’ confidence in the Eurozone’s debt, a strong EU law enforcement authority in criminal matters is needed. The parallelism with the US approach is deserved: mismanagement of federal funds is a federal crime prosecuted at the federal level. Though not a federal State, the EU has in this area the same problems as if it were. The injection of Billions of Euros through the bailout programs makes the situation ever more pressing. If the EU is able to provide a uniform system of enforcement at the EU level i.e., federal, not national, level, in matters concerning criminal misconduct affecting EU financial interests, investors will more likely regain the confidence lost in European sovereign debt.

A Market Perspective on the European Sovereign Debt and Banking Crisis

Europe has been beset by an interrelated banking crisis and sovereign debt crisis. Bond spreads faced by Greece and Ireland, and to a lesser extent Portugal followed by Spain, have increased. This paper explores these issues from the perspective of financial markets, focusing mainly on the four countries in the frontline of these pressures: Greece and Portugal, on the one hand, where the problems are primarily fiscal in nature; and Ireland and Spain, on the other, where banking problems related to the property boom and bust have been the key moving part. The paper first examines the probabilities of default implicit in observable market spreads and considers these calculations against sovereign debt dynamics. It then explores the implications of the interaction between bank losses and fiscal deficits on the one hand, and the feedback that any debt haircuts anticipated by markets could have on bank solvency. The study finds that market-implied sovereign default probabilities do in fact discriminate quite clearly between countries based on five criteria that affect the probability of debt restructuring. The discussion highlights some implications for banking system balance sheets of expected losses and shows the potential impact on them of sovereign restructuring implicit in market analysis. While the paper does not make any recommendations for policy action, it does explore a range of policy options and the implications each might have for the financial markets. JEL Classification: G01, G12, G15, G18, G21, H06, H60, H62, H63, H68 Keywords: financial crisis, sovereign risks, public deficits and debt, bond markets, banks.