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Title: What markets fear : understanding the European sovereign debt crisis through the lens of repo market liquidity
Author: Genito, Lorenzo
ISNI:       0000 0004 8497 9323
Awarding Body: University of Warwick
Current Institution: University of Warwick
Date of Award: 2018
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This study calls into question the use of sovereign bond yield differentials (spread) as an indicator of fear of default during the euro crisis. The spread between the German bund and other euro area sovereign bonds has been widely employed by academics and regulators primarily as an indicator of the financial markets' perception of sovereign default risk. I argue that the fixation with fear of sovereign default as the key driver of market sentiment stems from a significant gap in the literature regarding the mechanisms underpinning the provision of bank funding in the euro area. On the one hand, sovereign bonds are the main source of collateral in repo contracts, key financial instrument banks use to access short-term funding in the euro area. On the other hand, central counterparty clearing houses (CCPs) clear a significant proportion of repo trades in the euro area, which means that these companies play a fundamental (yet neglected) role in the connection between sovereign debt and bank funding in Europe. One of the arguments made here is that the ways in which European financial integration has been carried out has made sovereign debt markets in the euro area vulnerable to what I call CCP-induced collateral crises. Indeed, the key finding of this study is that the sudden increase in collateral requirements by LCH. Clearnet, one of the world's largest CCPs, reduced the liquidity of Irish, Portuguese, Italian and Spanish sovereign bonds as collateral to access short-term funding in repo transactions. This led banks in the euro area to conduct largescale bond sell-offs of the above mentioned securities, destabilising sovereign debt markets and widening spreads. This project concludes that the widening of the spreads from 2010 to 2012 was therefore also an indication of investors' concerns with liquidity risk, and not only of fear of sovereign default.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: HB Economic Theory ; HJ Public Finance