Public Finance and Banking Sector during the European Debt Crisis(Pages: 1-12)

Nicolas Huchet* and Bénédicte Serbini

University of Toulon, LEAD
University Savoie Mont Blanc, IREGE

Abstract:

Based on a panel of Member States of the Eurozone between 2008 and 2013, we focus on the effect of both public expenditure and banking on ten-year sovereign spreads. By using fixed-effects’ estimations and cluster-robust standard errors with a monthly frequency, we highlight that investors kept on scrutinizing fundamentals about debt sustainability during the sovereign debt crisis, despite the importance of risk aversion. In addition to budgetary balance and debt, distances to the stabilizing primary balance and public investment indicate that markets are sensitive to specific items of public expenditures and not only their level. Then, our findings support the hypothesis of a risk transfer between private and public sectors, which legitimates long-term refinancing operations by the central bank and put the emphasis on the need to go further as regards European integration, especially the single resolution mechanism.

JEL Classifications: F34, G12, E43, E62.

Keywords:

Interest rate premium, Public investment, Primary Balance, Sovereign debt, Bank credit risk, Liquidity.