One crisis, two crises…the subprime crisis and the European sovereign debt problems

This article explores the link between the subprime crisis and the European sovereign debt crisis. Using a panel data approach, we estimate the impact of the different government interventions aimed at rescuing financial institutions on the significant increase of the costs of public debts as measured by the interest rate spreads with respect to Germany. We show evidence on the existence of a statistically significant link between the two crises embodied by capital injections and government guarantees. More specifically, the two types of government interventions have a negative impact on the cost of the sovereign debts under study. This empirical result can explain why the sovereign debt crisis immediately followed the subprime crisis.