Boissel, Charles and Derrien, François and Ors, Evren and Thesmar, David, Sovereign Crises and Bank Financing: Evidence from the European Repo Market (April 29, 2014). Available for download at SSRN: http://ssrn.com/abstract=2506677

“We examine the impact of the European sovereign debt crisis in 2008-2011 on a key segment of the European interbank market, the General Collateral (GC) repo market. We find that repo rates respond to movements in sovereign risk, in particular at the peak of the crisis in 2011 and in GIIPS countries. This is surprising given that our data are from the safest segment of the European repo market, in which a centralized-counterparty clearinghouse (CCP) assumes counterparty default risk. Moreover, we document that in 2011 the repo market behaved as if the probability of CCP default (conditional on sovereign default) was very large, and did not react to attempts at raising haircuts. The ECB’s long-term refinancing operation of December 2011 alone was able to disconnect the repo markets from the sovereign crisis. Overall, our evidence is consistent with CCPs providing some protection in periods of intermediate sovereign stress (2009-2010), but being ineffective at the peak of the sovereign crisis (2011).”