Study On Risk Conduction Of European Sovereign Debt Crisis

The current global financial crisis began with the U.S. subprime crisis in August2007, the bankruptcy of Lehman Brothers in September2008led to the banking crisis in the United States which caused the global financial crisis. As countries have been adopted liberal economic policies, the negative effects of the policy also appear, financial crisis evolved into the sovereign debt crisis in December2009and continued to spread and deepen in the euro zone. To deal with the debt crisis, the majority of European countries launched fiscal austerity in2010, the European Central Bank has implemented a series ultra-loose monetary policy, however, the policy effect is limited, the debt crisis is difficult to quell and more intense. The nature of the debt crisis stems from the vulnerability of the national credit, and is also the result of risk conduction and cumulative, the risk conduction mechanism is the key to the crisis breaking out and intensifying, which bring crisis to the level of systemic risk by enciclomedia of financial instability. At present, the euro-zone countries’systemic risk is widely conducting and accumulating; sovereign credit risk is a prominent problem and generates a tremendous spillover effect, which causes a sustained, comprehensive and far-reaching impact on the global economy. At the same time, national credit vulnerability is a particularly prominent problem in world’s major economies, including the United States, China, in addition to the euro-zone countries. In this context, this paper describes mechanism, measures scale and analysis effect of risk conduction, combined with existing studies of European countries debt crisis, and thus proposes coping strategies to avoid the national credit vulnerability and risk transfer, the research has an important theoretical and practical significance.After the outbreak of the global financial crisis, the external risks transmitted to various countries through financial channels above all, European banking sector is seriously affected, and systemic risk accumulates quickly, and affects other domestic economy sectors through the balance sheet mechanism. As the domestic financial sector and the corporate sector cannot withstand the external shocks, the government must strengthen intervention force, excessive accumulation of public sector debt makes solvency risk highlight in some countries; face of massive debt default, national public sector is facing massive debt default, which causes risk rising to national credit level. Currently, debt risk problem of Greece, Ireland, Portugal, Spain and Italy is most serious, liabilities and deflation occurs alternately. Despite there are some differences in European countries’outbreak department, conduction mechanism, sphere of influence and response measures in the crisis, but the nature of the reasons is because the economic system debt ratio is too high, making national credit fragility highlight. Therefore, crisis management is to ask the State Government to adopt reasonable policies to circumvent the national credit vulnerability and slow down risk conductivity. Looking at causes of the European debt crisis, the crisis is fueled by external factors such as the global debt crisis, the international rating agencies and international speculation, and internal factors such as institutional weaknesses in Euro zone single monetary policy, economic structural imbalances.from a risk conduction process point of view, the risk not only transmits in the territory of euro area,,but also transmits in the world, and make a serious impact on intra-European economy, international financial markets and the global economy recovers.Therefore, from the perspective of systemic risk conduction, this paper analyzes the sovereign credit risk, solvency risk and market-implied risk of economic sector. Based on summarizing the existing research, it explains the formation process of the European sovereign debt crisis; Secondly, Based on real economy path, financial path and the expected path, this paper characterizes risk conduction mechanism of European sovereign debt crisis, and measures out the systemic solvency risk of European corporate sector and financial sector; Thirdly, this paper uses systemic CCA framework to measure the market-implied risk of corporate and financial sectors, and possible transfer amount to the public sector; Fourth, this paper uses econometric methods, mainly GVAR model to analyze the risk conduction effect of European sovereign debt crisis in the euro area domestic and cross-border; Finally, proposing coping strategies from a global perspective. Section of this paper is organized as follows:The first chapter is the introduction. This chapter firstly introduces the background and significance of the topics, defines important concepts such as the national debt crisis, the country’s credit and fragility, sovereign credit risk, systemic risk and conducting, then describes the paper’s framework structure, main contents and methods, finally illustrates innovation, insufficient and further research directions.The second chapter is a literature review. This chapter systematically summarizes the existing research on Sovereign debt crisis in Europe, including four areas:the debt crisis theory, the causes and evolution of European countries debt crisis, the risk conduction and measurement methods, the impact of the crisis and countermeasures, then evaluating and analyzing their shortcomings and advantage, based on the balance sheet method, the network structure theory and risk conduction and metrics of the systemic CCA method are important foundation for this study.The third chapter is the theoretical basis. On the basis of summarizing domestic and foreign research, this chapter expounded the formation mechanism of the crisis from three aspects, including the euro-zone countries expansionary fiscal financial, tired constraints of the public debt and the country credit risk, euro zone debt and deflationary spiral development, at the same time, the chapter make a systematic description about macro-balance sheet method, systemic CCA which were used in the study of risk conduction and metrics, as the theoretical basis of this article.The fourth chapter is risk conduction mechanism of the European Sovereign debt crisis. This chapter is based on three aspects of risk transfer, including real economy path, financial path and expected path, comprehensively analyzes the transmission mechanism of the European Sovereign debt crisis, by creditor channels, banking channels, international trade channels, asset price channel and market anticipation channel. Because a result of conducting the risk will be reflected in the final stock of Macro Balance Sheet, so this chapter selects listed company data in English, German, French, and "PⅡGS", builds the balance sheet of European financial and the corporate sector to analyze these two major sectors’solvency risk during the crisis.The fifth chapter is risk conduction measure based on the systemic CCA method. This chapter presents the ideas about measuring of systemic liquidity risk with systemic CCA method and builds risk-adjusted balance sheet of eight European countries’ enterprises and financial sector, according to the joint expected loss analyzes implied default risk of the two major economy sectors. At the same time, based on implicit guarantee mechanism of the public sector to the financial sector, this chapter calculates each country’s public sector possible liabilities, quantifies the possible risk transfer of the financial sector in the crisis.The sixth chapter is the risk conduction effect of the debt crisis in European countries. Firstly, this chapter use debt spreads data with bonds yields spreads from2007to2012for "PⅡGS" relative to Germany’s, according to the impulse response function of various national credit spreads under a standard impact, to analyze the risk conduction effect of the euro zone debt crisis countries. Secondly, based on the eight euro area and25non-euro area countries’ trade relationship matrix, this chapter uses the GVAR model to analyze the reflect that world economy was impacted by the euro area, emphatically analyzes influence under GDP and price of securities shock in the euro area to euro zone as well as trade relations area, such as the United Kingdom, the United States and China.The seventh chapter is conclusions and countermeasures. Based on overall research ideas, this chapter summarizes three questions, including risk transmission mechanism of the debt crisis in European countries, the risk of conduction measurement results, as well as the territory of the euro zone and cross-border risk conduction effect, and recommends three coping strategies, including promoting structural reforms and economic growth in the euro area, strengthening national debt management and avoiding national credit vulnerability, preventing impact in different paths and mitigating risk conductivity.This paper compares to other similar literature, there may be four innovations: first. From the perspective of sovereign credit risk, this paper depicts the mechanism of public debt continued growth under single monetary policy and decentralized fiscal policy, interprets the formation process of sovereign debt and deflation spiral development in euro zone, and proposes the national debt management measures, based on avoiding credit vulnerability; second, this paper Uses the balance sheet method, depicts the transmission mechanism of the crisis, builds an important economy sectors in crisis conduction-overall financial sector and the corporate sector’s balance sheet in8European countries, in order to analyze the solvency risk level of accumulation of these two sectors; third, this paper proposes whole idea of systematic CCA method, on the one hand builds European financial sector and corporate sector risk-adjusted balance sheet to analyze implied default risk of these two sectors in crisis; On the other hand based on the implied guarantee relationship between public sector and the financial sector, calculates the public sector’s possible liabilities; Fourth, according to the trade relations matrix of euro zone with other countries,this paper designs foreign variable weights, uses GVAR model to analyze interaction between the euro area and world economy, emphatically analyzes the affect of euro area GDP and securities prices to the euro area, the United Kingdom, the United States and China.