Determinants of Government Bond Spreads in New EU Countries

Abstract

4Non-technical summary 5

What Explains the Surge in Euro Area Sovereign Spreads During the Financial Crisis of 2007–2009?

“…remain highly statistically significant. We also use a cross-sectional "country" identifier to check the robustness of our Intl.Risk variable, which is common across countries (and 20 See for instance Alexopoulou et al (2009).…”

The Significance of Country-specific and Common Risk Factors for CEE Government Bond Spreads Changes

“…If the country gets closer to the bottom limit set through the Stability and Growth Pact, it casts doubt of the probability of the non-fulfilled country's debt commitments and increases the risk of default on sovereign debt. In regard to Akitoby et al (2008), and Alexopoulou et al (2009), and as pairwise correlations at the country level show there are highly negative correlations with the fiscal balance-to-GDP ratio for Lithuania and Slovenia and a strong positive relationship between spreads and the government debt-to-GDP ratio for Bulgaria, Hungary, Latvia, Poland, Slovakia, and Slovenia.…”

“…Alexopoulou et al (2009) presumed that markets should make an immediate response to changes in interest payments made on public debt, rather than to changes in the principal. Strong and positive pairwise correlation results are a confirmation of such relationship, especially in the case of Czech Republic, Hungary, Latvia, and Slovenia.…”

“…According to Alexopoulou et al (2009), it is supposed that spreads tighten in the context of improved real convergence. The negative sign of correlation is determined for all analysed countries except Romania and Poland.…”

“…Consequently, the increase in the inflation rate should put upward pressure on government bond yields. Whenever the rise in inflation is perceived by investors as having a structural rather than transitory source, higher inflation may well coexist with lower long-term interest rate differentials (Alexopoulou et al (2009)). …”