Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/296068 
Year of Publication: 
2024
Series/Report no.: 
CESifo Working Paper No. 10979
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Acknowledging the potential detrimental impact that twin-deficits may have on sovereign risk, this study uses a two-step approach to assess the impact of fiscal and external sustainability on sovereign risk dynamics for a panel of 27 European Economies between 2001Q4 and 2022Q3. To do so, we first estimate a country-specific time-varying measure of fiscal sustainability, through the cointegration between government revenues and expenditures, and of external sustainability, derived from the exports-imports cointegration. We then resort to those time-varying coefficients to assess their impact on sovereign risk, proxied by 10-year CDS and CDS spreads (against the US) making use of Weighted Least Squares (WLS) analysis. Noticeably, we show that an improvement of both fiscal and external sustainability lead to a reduction in sovereign risk. This phenomenon becomes notably pronounced, particularly when examining countries experiencing an upward trajectory in their public debt levels.
Subjects: 
sovereign risk
fiscal sustainability
external sustainability
CDS
CDS spreads
JEL: 
C23
F45
G23
G32
H63
Document Type: 
Working Paper
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