One crisis, two crises…the subprime crisis and the European sovereign debt problems

- We study the factors determining the increase in the European sovereign debt spreads.
- We use a dynamic panel method on ten European countries in a GMM and PMG approach.
- Capital injections and stock market drops determined the enlargement of the spreads.
- The role played by guarantees is more mitigated.
- We do not manage to find a significant impact of Central Bank support.

This article explores the link between the subprime crisis and the European sovereign debt crisis. Using a panel data approach, we estimate the impact of the different government interventions aimed at rescuing financial institutions on the significant increase of the costs of public debts as measured by the interest rate spreads with respect to Germany. We show evidence on the existence of a statistically significant link between the two crises embodied by capital injections and government guarantees. More specifically, the two types of government interventions have a negative impact on the cost of the sovereign debts under study. This empirical result can explain why the sovereign debt crisis immediately followed the subprime crisis.