Eurozone Bail-out Or Bail-in: Predicting Effects On Bond Interest Rates

Eurozone banks hold large amounts of domestic sovereign-issued bonds on their books.

Flash Economics Economic Research analyst Patrick Artus examines the implications of the transition, from a bailout regime to bail-in, on Eurozone banks’ holdings of these bonds.

Definitions

Eurozone Bailout regime:

A situation where banks losses are covered by the government. Government bonds held by banks are a sovereign risk, not a banking risk. This is because if the value of these bonds crashed, the government would need to bailout the banks for the loss. The increased risk would cause interest rates on government bonds to rise compared to bank issued bonds.

Eurozone Bail-in regime:

The current situation when a bank’s risk...