This paper reveals the underlying market preferences for sovereign debt of distressed euro area countries. We employ a generalised flexible market loss, as it nests both the linear and the non-linear form, as a function of the ‘basis’, the difference between sovereign bond spread and the Credit Default Swap. Our evidence shows that market preferences lean towards pessimism for some countries, in particular Greece. Those preferences do not remain stable over time as they shift further towards pessimism post the Greek bail out in spring 2010. As part of sensitivity analysis we apply a multivariate loss function to account for contagion effects in forming market preferences among different sovereign bonds. We also examine the impact of specific financial and fiscal governance factors on market preferences. Our results suggest that the market closely monitor fiscal fundamentals so as to shape preferences.

In light of the ongoing restructuring of the European banking industry and the challenging macroeconomic environment, banks have increased their efforts to reduce operating costs. Yet, the institutional features that affect banks’ ability to adjust costs and in particular personnel expenses, which comprise a significant part of banks’ non-interest cost structure, have not been adequately studied. This paper investigates the effect of labour market institutions and regulations on bank performance in 15 European countries over the period 2005–2010, using the Fraser index for labour regulation and its disaggregated sub-components. We propose a novel methodology to measure performance, based on the seminal work of Kumbhakar and Tsionas (2005), which allows the estimation of technical and allocative efficiency and the examination of the effect of labour market regulations in a single stage. Results indicate the existence of a positive relationship between the liberalisation of EU labour markets and allocative efficiency, while the effect on technical efficiency appears to be negative, although not statistically significant. When looking at the disaggregated components of the labour index, we further confirm that different forces are at play.