Title
Financial sector weakness and public debt build-up in the Euro areaFinancial sector weakness and public debt build-up in the Euro area
Author
Faculty/Department
Faculty of Applied Economics
Research group
Economics
Publication type
article
Publication
Bruxelles,
Subject
Economics
Source (journal)
Revue bancaire et financière. - Bruxelles, 2003, currens
Volume/pages
(2012):8, p. 508-516
ISSN
2033-7825
Carrier
E
Target language
English (eng)
Affiliation
University of Antwerp
Abstract
The financial crisis has renewed the interest in the relationship between financial sector weakness and sovereign debt sustainability. To assess the direct effect of financial sector weakness on sovereign debt during the recent crisis we decompose the debt build-up of the euro area countries between 2008 and 2011 into the primary deficit, a snowball effect, and stock-flow adjustments. It appears that in some countries the sovereign debt increase was mainly attributable to financial sector bail-outs, but that overall, the indirect effects of the financial crisis have prevailed. Besides explicit liabilities governments also widely assumed contingent liabilities. To assess the implications of linkages between weak financial institutions and sovereign debt sustainability we show the results of a simulation exercise based on a simple model. One insight is that the existence of an adverse feedback loop between banking and sovereign risk is problematic both with and without recapitalization of financial institutions by governments. This asks for policies to be taken to break the strong linkages in order to prevent ailing financial institutions and sovereigns to end up in a vicious circle.
E-info
https://repository.uantwerpen.be/docman/iruaauth/255c00/bf5604e616e.pdf
http://www.stradalex.com/nl/revues.php?spage=revuesView&revueselected=rbf_bfw#top
Handle