Sovereign Credit Worthiness and Financial Stability
About the Lecture
The lecture Sovereign Credit Worthiness and Financial Stability by Edu Pristine is from the course Archiv - Current Issues of FRM. It contains the following chapters:
- Three Conditions
- Transmission of Financial Sector Risks to Sovereigns
- Transmission of Sovereign Risks to the Financial Sector
- Leading to the Economic Crisis
- Where do we stand now
- Questions
Author of lecture Sovereign Credit Worthiness and Financial Stability
Edu Pristine
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Excerpts from the accompanying material
... As a result, financial institutions entered the crisis undercapitalized, highly leveraged, and with huge maturity and currency balance sheet mismatches. Sovereigns did not build adequate fiscal buffers during the boom prior to the crisis. ...
... This shrinks the credit supply that further dampens the economic activity which, in turn, leads to a decline in tax revenues and a rise in government expenditure. Thus, the fiscal deficit rises and the creditworthiness of the sovereign deteriorates. ...
... Thus, holdings of domestic government bonds as a percentage of bank capital tend to be higher in countries with high public debt. ...
... and equity investors cheered the increasing profits and expanding economy despite ever increasing leverage in the system. Complacency led to a build up of vulnerabilities in the system. Global financial integration played a significant role in facilitating this leveraging process. ...
... The expansionary phase of the business cycle boosted the public sector's accounts over and above the cyclically adjusted levels. ...
... But initially, as data on bond yields and CDS spreads suggest, investors worried mainly about the financial institutions and little about the sovereign creditworthiness. ...
... Investors became much more aware of the possible risk transfer between banks and sovereigns. Thus, bank and sovereign CDS spreads became much more positively correlated with each other. ...
... Portugal and Spain fell from EUR 568 billion at the end of the third quarter of 2009 to EUR 335 billion at the end of the second quarter of 2011 – a 41% decline. ...
... large amounts of domestic debt (in some cases, exceeding 100% of their Tier I capital). ...
...Integration of global financial system requires prudence in policymaking. Task for policymakers – to restore the risk - free status of sovereigns and command the confidence of the market participants. ...
