DID THE ABSENCE
OF A CENTRAL BANK BACKSTOP IN THE SOVEREIGN BOND MARKETS EXACERBATE SPILLOVERS DURING THE
EURO-AREA CRISIS?
Heather D. Gibson
Bank of Greece
Stephen G. Hall
University of Leicester, Bank of Greece and University of Pretoria
Deborah Gefang
University of Leicester
Pavlos Petroulas
Bank of Greece
George S. Tavlas
Bank of Greece and Hoover Institution, Stanford
University
ABSTRACT
The euro-area sovereign debt crisis was characterized by feedback loops
between (1) sovereign bond ratings and sovereign spreads in single
jurisdictions and (2) sovereign spreads and ratings among jurisdictions. One
explanation of this circumstance is that the ECB was unable to perform the role
of lender of last resort in the sovereign bond markets during the crisis. We
provide a spatial framework that allows us to distinguish among European
countries whose central banks were permitted to function as lender of last
resort in those markets and countries whose central banks were not permitted to
do so. Our results are consistent with the view that the absence of a central
bank backstop in the sovereign bond markets exacerbated feedback loops.
Keywords: euro-area crisis, simultaneous spatial model,
European banks, spreads, sovereign ratings
JEL-Classification: E3, G01, G14, G21
Acknowledgement: We are grateful to Xiaodong Liu for making the
Monte Carlo Matlab code available to us from his paper Liu and Saraiva (2019).
Correspondence:
George S. Tavlas
Bank of Greece
21 E Venizelos Ave
Athens, 10250, Greece
Tel. no. +30 210 320 2370
Fax. no. +30 210 320 2432
Email:gtavlas@bankofgreece.gr