Sovereign Risk: Shifting Gears to Fiscal Consolidation, Will it Work This Time?May 23, 2011 Posted by: Melina Hadiwono, CFA
Market discipline has forced Europe heavily-indebted countries to implement credible plans for fiscal austerity which is seemingly detrimental for their future growth potential. Given the continued economic and fiscal challenges faced by many sovereigns, we expect the relative economic performances of many European countries to diverge further.
Despite the European Financial Stability Facility to support challenged peripheral euro zone countries, investors remained concerned about the possible of debt restructuring and the systematic implications of fiscal problems in Europe. We expect sovereign risk will be a key source of volatility for the global banking sector as there continues to be a strong correlation between bank and sovereign CDS spreads.
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