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Sovereign-Bank Diabolic Loop: The Government Procurement Channel

Orador convidado

Diana Bonfim (Banco de Portugal e UCP)


Sala 0.04 EEG & Online


Início25.05.2022 11:00Fim25.05.2022 12:00

Tipo de inscrição

Online via E-mail

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Resumo do evento

We show that banks’ lending exposure to firms with government procurement contracts can amplify the diabolic loop between sovereigns and banks. Using the fiscal austerity measures implemented during the 2010-2011 European sovereign debt crisis as a shock to government procurement, we find that banks with higher exposure to these firms reduced lending significantly more than banks with lower exposure, controlling for firm-specific credit demand. The reduction in credit supply is economically as important as the effect of banks’ sovereign debt holdings, and affected both firms with and without government contracts. Firms with lending relationships with affected banks experienced lower sales growth, assets growth, employment growth, and investment. This decrease in real economic activity is likely to reduce tax revenue, further amplifying the diabolic loop.


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