When the first phase of the crisis focused primarily on the interbank market volatility, the second phase spread on the instability of public finance. Although the overall stance of public finances of the new members is better than the old member countries of the European Union, the differences within the new group are significant (from the performer Estonia to the laggard Hungary). Sovereign CDS spreads have become major variables focused on risks and expectations about the fiscal situation of

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... different countries. In this paper we investigate, first, whether there is a link in the new member states (NMS) between the expectations about the condition of their public finances and the dynamics of money markets, including integration of national money markets with the euro area. In other words we contribute to clarify the relationship between fiscal and liquidity risks as major components of the systemic risk. Second, we look on the particularities of this relationship through the different phases of the crisis and across the different countries using different monetary regimes. This concerns mostly two opposite extreme monetary regimes, namely, currency boards (and quasi-fixed exchange rate) -Bulgaria, Estonia, Latvia, Lithuania, and inflation targeting -Poland, Czech Republic, Hungary and Romania. The results obtained from the high frequency panel data models support the theoretical hypotheses and policy intuition that it exists a strong relationship between the liquidity risk (measured by the short term money markets) and the fiscal risk (measured by CDS) and that this link is extremely unstable and in some sense nonlinear during the recent financial crisis. Our study confirms that the strong link between monetary and public finance risk as a part of total systemic risk increases during the crisis especially for currency board regimes, when the link becomes stronger and more pronounced. For the inflation targeting countries the link becomes weaker and less pronounced. JEL code: E43; G10; P20; F31; F34