Score contribution per author:
α: calibrated so average coauthorship-adjusted count equals average raw count
Sovereign bond spread shocks are thought to threaten debt sustainability mainly through their impact on refinancing costs. Our analysis sheds light on a less evident channel, we call it the spread-credit channel. It originates from the negative impact of spread shocks on bank loans, which can trigger a “diabolic loop” between slowing economic activity, high debt, increasing spreads and banks’ vulnerability. Contrary to other studies in the literature, we identify the structural shocks to the Italian spread using a Proxy-SVAR model. The Bayesian estimation of the Proxy-SVAR shows that spread shocks negatively affect bank lending and economic activity making the debt-to-GDP ratio increase. Debt sustainability also depends on how investors react to shocks. We find evidence that foreigners disinvest, while domestic investors buy more debt when it becomes riskier.