Does the European Financial Stability Facility bail out Sovereigns or Banks? An Event Study.

B.L. Horvath, H.P. Huizinga

Research output: Working paperDiscussion paperOther research output

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Abstract

On May 9, 2010 euro zone countries announced the creation of the European Financial Stability Facility as a response to the sovereign debt crisis. This paper investigates the impact of this announcement on bank share prices, bank CDS spreads and sovereign CDS spreads. The main private beneficiaries were bank creditors, especially of banks heavily exposed to southern Europe and Ireland and located in countries characterized by weak public finances. Furthermore, countries with weak public finances and banking systems heavily exposed to southern Europe and Ireland benefited, as evidenced by lower sovereign CDS spreads. The combined gains of bank debt holders and shareholders exceed the increase in the value of their sovereign debt exposures, suggesting that banks saw their contingent claim on the financial safety net increase in value.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Number of pages42
Volume2011-118
Publication statusPublished - 2011

Publication series

NameCentER Discussion Paper
Volume2011-118

Fingerprint

Bailout
Event study
Financial stability
Credit default swap (CDS) spreads
Ireland
Public finance
Share prices
Announcement
Financial safety net
Sovereign debt crises
Bank debt
Banking system
Contingent claims
Shareholders
Sovereign debt
Euro zone

Keywords

  • Bailout
  • Banking
  • CDS spreads
  • Sovereign debt

Cite this

Horvath, B. L., & Huizinga, H. P. (2011). Does the European Financial Stability Facility bail out Sovereigns or Banks? An Event Study. (CentER Discussion Paper; Vol. 2011-118). Tilburg: Economics.
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Horvath, BL & Huizinga, HP 2011 'Does the European Financial Stability Facility bail out Sovereigns or Banks? An Event Study.' CentER Discussion Paper, vol. 2011-118, Economics, Tilburg.

Does the European Financial Stability Facility bail out Sovereigns or Banks? An Event Study. / Horvath, B.L.; Huizinga, H.P.

Tilburg : Economics, 2011. (CentER Discussion Paper; Vol. 2011-118).

Research output: Working paperDiscussion paperOther research output

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