The objective of the paper is that of disentangling, in the eve of the Euro, the exchange rate risk induced spread in the european government bond from the credit/default risk induced spread. spread. Paradoxically, if the main risk component were that induced by the exchange rate risk, it would be optimal to have countries enter the Euro even if they do not satisfy the Maastricht constraints, as it would be more difficult to satisfy these just due to the exchange risk. However if, on the contrary, spreads are due to credibility problems, the convergence game could induce investors from more "virtuous" Euro countries to invest in high Yield bonds with t he view to a convergence only to realize, afterward, that such investments would create a systemic risk factor for the Euro area if credibility of less "virtuous" countries is not restored.
European financial markets integration and the risk premium on Italian government debt
CORIELLI, FRANCESCO;
1996
Abstract
The objective of the paper is that of disentangling, in the eve of the Euro, the exchange rate risk induced spread in the european government bond from the credit/default risk induced spread. spread. Paradoxically, if the main risk component were that induced by the exchange rate risk, it would be optimal to have countries enter the Euro even if they do not satisfy the Maastricht constraints, as it would be more difficult to satisfy these just due to the exchange risk. However if, on the contrary, spreads are due to credibility problems, the convergence game could induce investors from more "virtuous" Euro countries to invest in high Yield bonds with t he view to a convergence only to realize, afterward, that such investments would create a systemic risk factor for the Euro area if credibility of less "virtuous" countries is not restored.
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