Changes in long-term government bond yields are an important driver of corporate bond yields and bank lending rates – either through arbitrage relations or through sovereign bonds directly serving as a benchmark for the pricing of loans and other assets. Through this and other channels, the sovereign bond market turmoil rapidly spilled-over to banks, and ultimately it reached households and firms.
As a consequence, the entire economy’s lending conditions deteriorated significantly in the countries under stress. The implications of the crisis were not confined to countries under stress but also visible in core euro area countries. With fears of a euro area break up growing, core euro area economies became the destination of safe haven flows.