Understanding the probability and magnitude of financial contagion is essential for policymaking. This column applies a framework for modelling financial contagion to data on the cross-holding and credit risk of sovereign debt in Europe. Credit markets perceived little risk of contagion from these spillovers following a sovereign default. It is important for policy to assess other possible channels for contagion that could generate even bigger losses.
Brent Glover, Seth Richards-Shubik, Wednesday, November 12, 2014
Ashoka Mody, Tuesday, January 7, 2014
On 19 October 2010, Angela Merkel and Nicolas Sarkozy agreed that in future, sovereign bailouts from the European Stability Mechanism would require that losses be imposed on private creditors. This agreement was blamed for the increase in sovereign spreads in late 2010 and early 2011. This column discusses recent research on the market reaction to the surprise announcement at Deauville. With the exception of Greece, the rise in spreads was within the range of variability established in the previous 20 days.