We analyse the poisonous interaction between bank rescues, financial fragility and sovereign debt discounts. In our … sovereign debt discount. We introduce long term government debt, which gives rise to the possibility of capital losses on bank … intermediaries causes bond prices to drop triggering capital losses at the bank under intervention. This mechanism shows the limits …

The theoretical literature remains inconclusive on whether changes in bank exposure towards the domestic sovereign have … an adverse effect on the sovereign risk position via a diabolic loop in the sovereign-bank nexus or reduce perceived … exogenous changes in bank exposure on the risk position of the sovereign within a Markov switching structural vector …