A vine-copula conditional value-at-risk approach to systemic sovereign debt risk for the financial sector

• We examine the impact of sovereign debt distress on the financial system.
• We examine Greek debt distress risk for European financial systems.
• We used CoVaR computed using copulas and vine copulas.
• The systemic risk of sovereign debt changed with the onset of the debt crisis.
• Greek debt distress had a negative impact but was limited to just a few countries.

We investigated systemic sovereign debt distress affecting European financial systems and the systemic risk implications for its European partners of a potential Greek debt default before and after the onset of the financial and debt crises, using the conditional value-at-risk (CoVaR) measure, characterized and computed using copulas and vine copulas. Before the debt crisis, sovereign debt was found to imply positive systemic risk for domestic financial systems across Europe. However, with the onset of the Greek crisis, the systemic impact of sovereign debt increased for countries like Greece, Italy and Portugal, while remaining stable or reduced for other countries. Regarding the systemic impact of sovereign Greek debt distress, our evidence indicates that negative impacts were limited to a small set of countries, notably Belgium, Italy, the Netherlands and Portugal.