The Sound of Economics Disaster risk in euro-area bond markets
Aug 20, 2025
In this discussion, Christoph Kaufmann, a Senior Economist at the European Central Bank, and Stavros Zenios from Bruegel analyze the intersection of political instability and investor behavior in euro area bond markets. They illuminate how different investment funds respond to fiscal shocks, revealing 'doom loops' that complicate debt sustainability. The conversation touches on the pressing need for safe assets and proactive policies to mitigate disaster risks, with real-world implications highlighted through examples like the Greek crisis.
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Investment Funds Amplify Euro Stress
- Investment funds uniquely sell sovereign bonds during euro-area stress, amplifying spreads.
- Banks temporarily absorb sales and insurers/households pick up debt later, often domestically.
Politics Drives Sovereign Risk Spikes
- Political events frequently trigger rapid spikes in sovereign credit risk measures like CDS.
- These political shocks coincide with worse financial conditions and rising market volatility.
Foreign Funds More Flighty
- Foreign-domiciled investment funds are more flighty and add to procyclicality than domestic funds.
- Distance and lower local expertise likely make non‑EU funds react faster to stress.