Authors: Eleftherios Thalassinos

Title: The European Sovereign Debt Crisis and the Role of Credit Swaps

Abstract

The main objectives of this research are to determine the factors responsible for the market pricing of sovereign default risk, to analyze the causalities of Credit Default Swaps (CDSs) spreads that have been taken as a proxy variable for the market pricing of sovereign default risk, to examine possible pricing discrimination and asymmetries between SWEAP and non-SWEAP countries, structural changes in the pattern of the CDS spreads throughout and after the crisis and possible evidence of speculation against the SWEAP group of countries.

In a panel data regression setting we have constructed a dynamic pricing model of sovereign default risk for 13 Euro area countries using quarterly data for the period 2008–2013. Significant variables comprise of the grading rate forward one period, the current governments’ bond yield, the inflation rate as well as the variable related to the public debt lagged one period. All variables, amongst others robust predictors of the CDS spreads, have been proven statistically and economically significant, except for the fiscal space of one quarter forward of the fiscal balance proven to be only weakly significant.