ABSTRACT
The onset of the European sovereign debt crisis, which originated in Greece in late 2009 and spread rapidly across the entire Eurozone, was accompanied by a surge of the Greek sovereign credit default swap (CDS) index. An important perspective to investigate in determining why the European sovereign debt crisis worsened so substantially is the connection between sovereign debt and the bank sector in the Eurozone. This chapter examines the causality between the spread of the Greek sovereign CDS index over that of Germany and the Eurozone banking sector CDS index, before and during the European sovereign debt crisis. It presents the empirical methodology and provides an explanation of dataset and findings from the causality tests. The results have especially significant implications for policymakers, who are keen to exert more control over sovereign CDS contracts traded in rather unregulated markets.
