CDS, bond spread and sovereign debt crisis in peripherial EU

In the last decade, many economies were marked by the severe financial crises since the Great Depression. The euro area faced considerable economic difficulties and the CDS has become the focal point of the current crisis. The euro sovereign debt crises started in Greece and later on, spread to the other peripherial European countries Spain, Portugal, Ireland, Italy and still continues. This experience address the increasing importance of „fiscal discipline” and the role of European Central Bank (ECB), if ECB with national central banks take on all responsibility in government bond markets, Euro area could be stabilized. Policy makers argue both financial and monetary policies in European Union (EU), and convergence criteria to adopting Euro. This paper aims to determine the relationship between credit default swap (CDS), bond spread and the debt ratio of the countries. In this framework, the interaction between CDS and sovereign bond spreads are examined as a measure of perceived country risk. The focus of the study is to show the role of these two variables on peripherial European countries, during the recent euro sovereign debt crisis.