Financial Repression in the European Sovereign Debt Crisis

Bo  Becker; Victoria  Ivashina

Article | Review of Finance | February 2018

Financial Repression in the European Sovereign Debt Crisis

Abstract

By the end of 2013, the share of government debt held by the domestic banking sectors of Eurozone countries was more than twice its 2007 level. We show that this type of increasing reliance on the domestic banking sector for absorbing government bonds generates a crowding out of corporate lending. For a given domestic firm, new debt is less likely to be a loan—i.e., the loan supply contracts—when local banks have purchased more domestic sovereign debt and when that debt is risky (as measured by CDS spreads). These effects are most pronounced in the period following the second Greek bailout in early 2010.

Keywords: Credit Cycles; Sovereign debt; Financial Repression; Sovereign Finance; Borrowing and Debt; Credit; Europe;

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Becker, Bo, and Victoria Ivashina. "Financial Repression in the European Sovereign Debt Crisis." Review of Finance 22, no. 1 (February 2018): 83–115.

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Financial Repression in the European Sovereign Debt Crisis

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