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What Explains The Surge In Euro Area Sovereign Spreads During The Financial Crisis Of 2007-09?

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Executive Summary

This paper uses a dynamic panel approach to explain the determinants of widening sovereign bond yield spreads vis-?-vis Germany in selected euro area countries during the period end-July 2007 to end-March 2009, when the financial turmoil developed into a full-blown financial and economic crisis. Emphasis is given to the role of fiscal fundamentals and government announcements of substantial bank rescue packages. The paper finds that higher expected budget deficits and/or higher government debt ratios relative to Germany contributed to higher government bond yield spreads in the euro area during the analysed period.

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