Posts categorized under Sovereign Debt

Sovereign distress and the credibility of deposit insurance

October 9, 2020
Deposit insurance arrangements are crucial to mitigate the likelihood of bank runs. However, the success of these protection schemes depends on their credibility, which explains why they are usually guaranteed by the sovereign. But what happens when the sovereign is also in distress? Can the sovereign backstop actually weaken the credibility of deposit insurance mechanisms in some circumstances? This paper examines two episodes that occurred during the euro area sovereign debt crisis (2010-2013) to better understand the role of the credibility of the sovereign backing the deposit insurance arrangements.

Sovereign exposures in the Portuguese banking system

November 27, 2019
The euro area sovereign debt crisis exposed the linkages between banks and sovereigns and their adverse implications. In 2010, when sovereign spreads rose in several countries, tensions swiftly transmitted to the banking sector, uncovering the intertwining of banks’ and the respective sovereigns’ creditworthiness. Against a backdrop of already fragile fiscal positions, public finances in some countries were hampered by government support to banking institutions to avoid further systemic stress. These transmission mechanisms were reinforced during the crisis because, as sovereign distress intensified and led to loss of market access in some countries, banks substantially expanded their holdings of domestic sovereign debt.

Case study: DBRS sovereign rating of Portugal: analysis of rating methodology and rating decisions

February 26, 2018
This paper examines the DBRS sovereign credit rating methodology and its rating decisions on Portugal. The paper identifies country-specific risk factors and technical specifications that justify the agency’s issuance of Portugal’s investment-grade notation throughout the sovereign debt crisis - which preserved Portugal’s access to the ECB bond purchase program. Both qualitative and empirical findings show that DBRS had a comparably lenient rating approach to Portugal within the DBRS cross-country rating decisions as well as in comparison to other rating agencies.

The Portuguese interbank money market during the subprime crisis and sovereign debt crisis

July 14, 2016
Money markets were severely impaired by the financial crisis and subsequent sovereign debt crisis. During the summer of 2007, BNP Paribas suspended redemptions for three investment funds due to the uncertainty regarding structured products. This event triggered the first stage of the financial crises in the euro area and linked it to the subprime mortgage crisis in the US. Afterwards, interbank lending was disturbed and the sovereign debt crisis aggravated the problem as country risk became a significant part of bank risk.