Σύνοψη

SELF-FULFILLING DYNAMICS: THE INTERACTIONS OF SOVEREIGN SPREADS, SOVEREIGN RATINGS AND BANK RATINGS DURING THE EURO FINANCIAL CRISIS

Heather D. Gibson

Bank of Greece

Stephen G. Hall

University of Leicester

Bank of Greece

 George S. Tavlas

Bank of Greece

University of Leicester

ABSTRACT

During the euro-area financial crisis, interactions among sovereign spreads, sovereign credit ratings, and bank credit ratings appeared to have been characterized by self-generating feedback loops. To investigate the existence of feedback loops, we consider a panel of five euro-area stressed countries within a three-equation simultaneous system in which sovereign spreads, sovereign ratings and bank ratings are endogenous. We estimate the system using two approaches. First we apply GMM estimation, which allows us to calculate persistence and multiplier effects. Second, we apply a new, system time-varying-parameter technique that provides bias-free estimates. Our results show that sovereign ratings, sovereign spreads, and bank ratings strongly interacted with each other during the euro crisis, confirming strong doom-loop effects.

Keywords: euro area financial crisis, sovereign spreads, rating agencies

JEL Classification: E63, G12

Acknowledgment: We thank the two referees for very helpful comments on an earlier draft. We are grateful to P.A.V.B. Swamy for providing the proof contained in the Annex.

Correspondence:

George Tavlas

Bank of Greece

21 E Venizelos Ave, Athens

10250, Greece

Tel. no. +30 210 320 2370

Fax. no. +30 210 320 2432