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Redenomination-risk spillovers in the Eurozone

Author:
Borri, Nicola
Source:
Economics letters 2019 v.174 pp. 173-178
ISSN:
0165-1765
Subject:
debt, risk, Belgium, Ireland, Italy, Spain
Abstract:
In this paper we use sovereign quanto-CDS spreads as proxy for redenomination-risk in the Eurozone, i.e., the risk of a sovereign default obtained by the redenomination of debt in a different currency. Quanto-CDS spreads are the difference between the CDS quotes in U.S. dollars and euros. We capture spillovers with ΔCoVaR, a risk-indicator proposed by Adrian and Brunnermeier (2016), that measures the difference between the value-at-risk of country i conditional on a state of distress in country j and the median state. Our sample starts on the onset of the Great Recession. We find that Belgium, Ireland, Italy and Spain are the only Eurozone countries exposed to redenomination-risk spillovers. However, in the shorter post-OMT sample, the only vulnerable countries are Italy and Spain.
Agid:
6227434