© 2011 International Monetary Fund WP/11/
IMF Working Paper
The Eurozone Crisis: How Banks and Sovereigns Came to be Joined at the Hip
Prepared by Ashoka Mody and Damiano Sandri
Authorized for distribution by Ashoka Mody November 2011
We use the rise and dispersion of sovereign spreads to tell the story of the emergence andescalation of financial tensions within the eurozone. This process evolved through threestages. Following the onset of the Subprime crisis in July 2007, spreads rose but mainly dueto common global factors. The rescue of Bear Stearns in March 2008 marked the start of adistinctively European banking crisis. During this key phase, sovereign spreads tended to risewith the growing demand for support by weakening domestic financial sectors, especially incountries with lower growth prospects and higher debt burdens. As the constraint of continued fiscal commitments became clearer, and coinciding with the nationalization of Anglo Irish in January 2009, the separation between the sovereign and the financial sector disappeared.JEL Classification Numbers: E6, F3, G1Keywords: sovereign spreads, financial sector, stock market, eurozone, Bear Stearns, AngloIrishAuthor’s E-Mail Address:email@example.com; firstname.lastname@example.org
For helpful discussions, we are grateful to Abdul Abiad, Olivier Blanchard, Mark De Broeck, Stijn Claessens,James Daniel, Erik De Vrijer, Peter Doyle, Juha Kähkönen, Peter McGoldrick, Antu Murshid, Tom O’Connell,Jari Stehn, Cedric Tille, Axel Weber, and participants to the Economic Policy panel in Warsaw and at seminars inthe IMF and the Irish Department of Finance. Susan Becker and Anastasia Guscina provided expert researchassistance. We acknowledge with gratitude the valuable guidance from three anonymous referees and Philip Lane.This is an updated and extensively revised version of the 2009
IMF Working Paper
09/108 “From Bear Stearns toAnglo Irish: How Eurozone Sovereign Spreads Related to Financial Sector Vulnerability.”
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