Abstract:

This paper develops a Composite Indicator of Systemic Sovereign Stress (SovCISS) for Romania, applying the methodology of Garcia-de-Andoain and Kremer (2018). The analysis shows a strong correlation between Romania’s bond market and those of the Euro area and Central European countries (CE3). This correlation indicates both economic convergence and increased exposure to external shocks. The decomposition of SovCISS reveals that credit risk, volatility, and bid-ask spreads contributed uniformly to market stress, with credit spreads playing a more significant role, particularly in 2021-2023. This development is likely driven in part by the tightening of monetary policy by the National Bank of Romania (NBR), similar to most central banks, in response to the recent inflationary environment. SovCISS proves to be an effective tool for early detection of market tensions and assessing financial stability. The results confirm that SovCISS is an essential tool for monitoring government bond market tensions, providing a comprehensive assessment of credit risk, volatility, and liquidity across both short- and long-maturity bonds, while also serving as a critical instrument for early risk detection and guiding policy decisions to safeguard financial stability.