Spain and the European sovereign debt crisis

•We examine the European debt crisis focusing on Spain.•The paper examines government bond yields in Germany and Spain.•There is clear evidence for structural change.•This could be a sign for increased sovereign credit risk.

This paper presents empirical evidence indicating that German and Spanish government bond yields are cointegrated. Thus, a stable long-term equilibrium relationship among these two variables seems to exist. However, there is also empirical evidence for the existence of a structural break in early 2009. Following Basse, Friedrich and v. d. Schulenburg (2011) we interpret this finding as an indication that financial markets started to see a higher sovereign credit risk in Spain. The structural break may even signal some fears about the return of exchange rate risk. Given that the break date is quite early; our empirical findings could be an indication that bond markets are at least partially efficient.