Using a database of Euro-denominated government bonds covering the period from January 2000 to December 2010, this paper provides an empirical analysis of the determinants of government credit spreads in the Euro-area. The analysis is divided into two sub-periods delimited by the global financial crisis that started in August 2007. We find evidence of a clear shift in the behavior of market participants from a convergence-trade expectation, based on market related factors, before August 2007, to one mainly driven by macroeconomic country-specific variables and an international common risk factor. There is no evidence of a significant role for the liquidity risk before or during the financial crisis period. Overall, our results give support to the Merton-type structural credit risk models and confirm that there are considerable similarities between the factors explaining the dynamics of the credit risk spreads and the factors driving the prices on the government bond markets.

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Credit risk,Structural models,Term structure of interest rates,Gaussian HJM multi-factor models

• Economia e Gestão - Ciências Sociais