Waiting for the confidence fairy: An analysis of European sovereign bond spreads before and after the financial crisis

David Gerard Uresti, University of Texas at El Paso

Abstract

The 2008 Financial Crisis that began in the United States caused widespread panic throughout the financial sector which resulted in the collapse of some companies and large losses for others. The availability of credit declined even as investor confidence continued to deteriorate. The European periphery concluded that the Financial Crisis would be relegated to the American economy. However, in 2009 Greece suffered a credit downgrade that signaled that the financial shock entered European shores. Shortly thereafter Spain suffered a credit downgrade followed by Italy in 2010. Suddenly the threat of default by a number of European countries became very real. The European Central Bank produced a number of financial rescue packages meant to shore up the economies of its ailing sovereigns. In return, these countries were expected to enact austerity measures to lower their debt levels and raise investor confidence. ^ The purpose of this thesis is to determine the effects of austerity measures on investor confidence by analyzing sovereign bond spreads in European countries before, during, after the financial crisis, and investigate the success of those measures. I expect to find that bond spreads act as a proxy for how markets respond to austerity measures as a sign of risk and economic health. ^ The period of analysis extends from January 2007 to December 2013 and has been divided into 2 sub-periods. The first period encompasses the buildup to the financial crisis, which began in early 2007 and ended December 31, 2008. The second period is marked by the financial stabilization scheme brought on by bank rescue packages and encompasses the aftermath of the financial crisis from January 2009 to December 2013. This paper found that countries that applied austerity measures correlated with lower bond spreads, but this is due to other factors. Austerity measures did not significantly raise GDP, lower debt, or spur an influx of investment.^

Subject Area

European studies|Economics|Finance|Political science

Recommended Citation

Uresti, David Gerard, "Waiting for the confidence fairy: An analysis of European sovereign bond spreads before and after the financial crisis" (2015). ETD Collection for University of Texas, El Paso. AAI1594390.
http://digitalcommons.utep.edu/dissertations/AAI1594390

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