Fiscal Fragility and Sovereign Risk in the Euro Area

We study the relative weight of macroeconomic (i.e., scal policy, banking exposure, growth perspectives, etc.) and nancial (i.e., aggregate and idiosyncratic risk, and sovereign bond markets liquidity) conditions as determinants of movements of 10-years sovereign bond spreads (over the Bund benchmark) in the Eurozone from 2000 to 2009, relying on cross-country quarterly data panel analysis. We nd that aggregate and idiosyncratic risk factors are fundamental drivers of sovereign spreads, both directly and interacting with structural conditions. With respect to the literature, we nd a wider set of macroeconomic conditions scal policy stance (i.e., level and maturity structure of outstanding debt, and scal balance), banking sector exposure (namely, level and structure of assets by borrowing sector), and short and medium-term growth perspectives - driving sovereign default risk. In line with the literature, we nd strong evidence of regime switching in parame

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