On the importance of indirect banking vulnerabilities in the Eurozone

This paper investigates banking and sovereign distress in the Eurozone and the importance of direct and indirect financial exposures. We use BIS cross-border banking claims to link member states in a GVAR framework and jointly model sectoral CDS premia. Based on balance sheet positions of an intermediate debtor country, we calculate indirect exposures and asses how the level of interconnectedness is impacted when indirect links are accounted for. We notice a general slowdown in financial integration and a reduction in cross-border assets in the hope of limiting international contagion. By differentiating between direct and indirect links, we show that the impact of reduced weights on core member states is mostly insignificant and that deleveraging strategies are not generally able to successfully reduce risk

Cross-border effects of fiscal policy in the Eurozone

We empirically assess spillovers from fiscal policy in the Euro area. We propose a structural multi-country factor-augmented vector autoregression model identified with sign restrictions and analyse the domestic and international effects of fiscal policy measures. By extracting information from an extended set of country specific and cross-border variables, we are able to account for the different channels through which government expenditure shocks are transmitted within as well as across borders. We find significant negative effects of fiscal consolidations on domestic output, private consumption and investment. More importantly, spending cuts in Italy and Spain induce significant and persistent output spillovers on Germany and France