The euro funding gap and its consequences

During the spring of 2010, financial markets in the eurozone started to signal a re-awakening of the global financial crisis. As the euro sovereign debt crisis gained momentum, the euro embarked on a steep slide, and government bond and credit default swap (CDS) spreads started to rise dramatically, reaching levels not seen since the introduction of the common currency.

Further, renewed pressures in the money market pushed up London Interbank Offered Rates (Libor), as banks became reluctant to

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