Credit Risk in the Euro Area

We construct credit risk indicators for euro area banks and non-financial corporations. These indicators reveal that the financial crisis of 2008 dramatically increased the cost of market funding for both banks and non-financial firms. In contrast, the prior recession following the 2000 US dot-com bust led to widening credit spreads of non-financial firms but had no effect on the credit spreads of financial firms. The 2008 financial crisis also led to a systematic divergence in credit spreads for financial firms across national boundaries. Credit spreads provide substantial predictive content for real activity and lending measures for the euro area as a whole and for individual countries.