The relationship between PIIGS banks balance sheet ratios and CDS spreads: an empirical analysis, European Journal of Economics, Finance and Administrative Sciences, ISSN 1450-2275, Issue 86 May, 2016
Author(s)
Angelini, Eliana
Ortolano, Alessandra
Date Issued
2016
Type
article
Abstract
The paper investigates empirically what kind of relationship between banking
sector's CDS spreads and balance sheet variables has been established, in the area most
affected by the sovereign debt crisis, during the period itself. To this purpose, we conduct
an analysis on a sample of PIIGS banks, compared to a sample of US ones, for the period
of the Eurozone crisis, 2009-2013.The study shows the peculiarity of banking sector
respect to other productive areas, in terms of relationship between balance sheet ratios and
CDS spreads, in order to evaluate credit risk. This research confirms the supposed
distortion of market informational efficiency, made by speculation: in particular we retain
that speculation on PIIGS banks derived from sovereign debt crisis, while the American
banks' one, was influenced mostly by the financial crisis, born just from the banks of this
area. The paper also highlights the relevance of sovereign short-term rating, in terms of
perception of the riskiness of market: specifically, we show how the banking sector has
been deeply influenced by Eurozone crisis. In particular, we note a stronger influence of
rating sovereign debt evaluation on PIIGS CDS spreads, respect to balance sheet ratios.