Government bond risk premiums in the EU revisited: The impact of the financial crisis

Hagen, Jürgen von; Schuknecht, Ludger; Wolswijk, Guido

doi:10.1016/j.ejpoleco.2010.07.002

Cited by 191 publications

(76 citation statements)

References 7 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…As the government effectively increases its share of non-performing assets, public finances deteriorate and consequently the bank"s credit risk is transferred to the public sector (Attinasi et al 2009). In a higher volatility regime, markets penalize fiscal imbalances more strongly than in a less volatile regime, notably before the collapse of Lehman Brothers (Von Hagen et al 2011). In contrast to Alter and Schüler"s (2012) research into individual countries" experiences, we argue that the private-to-public transfer of credit risk is also a characteristic at the level of the euro area.…”

Section: The Fundamentals Channel Hypothesiscontrasting

confidence: 42%

The quest for banking stability in the euro area: The role of government interventions

Kizys

Paltalidis

Vergos

2016

Journal of International Financial Markets, Institutions and Mo

View full text Add to dashboard Cite

Use policyThe full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. AbstractWe build upon a Markov-Switching Bayesian Vector Autoregression (MSBVAR) model to study how the credit default swaps market in the euro area becomes an important chain in the propagation of shocks through the entire financial system. The study sheds light on the regime-dependent interconnectedness between the risk of investing in banking and public sector bonds and provides novel evidence that a rise in sovereign debt, due to the countercyclical fiscal policy measures, is perceived by stock market investors as a burden on growth prospects. We also document that government interventions in the banking sector deteriorate the credit risk of sovereign debt. Higher risk premium required by investors for holding riskier government bonds depresses the sovereign debt market, it impairs banks" balance sheets, and it depresses the collateral value of loans leading to bank retrenchment. The ensuing two-way banking-fiscal feedback loop indicates that government interventions do not necessarily stabilize the banking sector.JEL Classification: C11, C58, G01, G21, G28.

show abstract

Section: The Fundamentals Channel Hypothesiscontrasting

confidence: 42%

The quest for banking stability in the euro area: The role of government interventions

Kizys

Paltalidis

Vergos

2016

Journal of International Financial Markets, Institutions and Mo

View full text Add to dashboard Cite

show abstract

“…Moreover, the negative reaction of primary deficits to unemployment variations increased after 2007:03 due to the reinforcement of the automatic stabilisers. Regarding the equation for the long-term yields on government bonds, we find that its sensibility to the fundamentals increased significantly after the crisis, which we interpret as meaning that markets did not price macroeconomic fundamentals before August 2007, but started to penalise fiscal and macroeconomic imbalances much more heavily after the crisis (a result in line with the one obtained by von Hagen 2011 andDe Grauwe 2012). In fact, our results reveal that fiscal fundamentals (the debt and the primary balance to GDP ratios) are not significant before the crisis, but turn significant, and with the expected signs, afterwards.…”

Section: The Estimated Resultssupporting

confidence: 70%

“…The impact of the GDP growth rate is positive before the crisis (which is not expected), but turns negative (0.02 -0.04 = 0.02) as expected after the crisis. This structural change supports the idea that time dependent risk perceptions driven by international factors (unrelated to the fundamentals) play an important role in explaining the unfolding of the debt crisis (again in line with von Hagen 2011 andDe Grauwe 2012).…”

Section: The Estimated Resultssupporting

confidence: 55%

The recent sovereign debt crisis in the Euro zone: A matter of fundamentals?

2015

View full text Add to dashboard Cite

The idea that the Euro zone sovereign debt crisis was caused by structural weaknesses degenerating into fundamental macroeconomic imbalances in the peripheral countries prevails among international institutions such as the IMF, the ECB, and the European Commission. On the contrary, some economists believe that this crisis is the consequence of major deficiencies in the architecture of economic policy making in the Euro zone that did not allow a proper response to a global systemic crisis of the financial markets that started in the United States. The objective of this paper is to provide a better understanding of the public debt dynamics in the EU, differentiating the case of Euro zone peripheral countries. We used quarterly data from 2000 to 2011 to estimate a small-scale model that takes into account the interactions between key variables. Our results do not support entirely the official view. We conclude that the cause of the adverse debt dynamics unravelling after 2007 was a sharp GDP contraction, coupled with a substantial increase in the interest cost of debt finance due to higher self-fulfilling solvency risks perceived by creditors, interacting with a higher sensitiveness of Euro zone peripheral countries to fundamentals.

show abstract

“…Indeed, this methodology has already been used in the literature to examine EMU sovereign spread determinants [see, e.g. Schuknecht et al (2009), Von Hagen et al (2011 or Gómez-Puig (2006 and]. …”

Section: Econometric Methodologymentioning

confidence: 99%

An update on EMU sovereign yield spread drivers in times of crisis: A panel data analysis

Gómez‐Puig

Sosvilla‐Rivero

Ramos-Herrera

2014

The North American Journal of Economics and Finance

View full text Add to dashboard Cite

We empirically investigate the determinants of EMU sovereign bond yield spreads with respect to the German bund. Using panel data techniques, we examine the role of a wide set of potential drivers. To our knowledge, this paper presents one of the most exhaustive compilations of the variables used in the literature to study the behaviour of sovereign yield spreads and, in particular, to gauge the effect on these spreads of changes in market sentiment and risk aversion. We use a sample of both central and peripheral countries from January 1999 to December 2012 and assess whether there were significant changes after the outbreak of the euro area debt crisis. Our results suggest that the rise in sovereign risk in central countries can only be partially explained by the evolution of local macroeconomic variables in those countries. Besides, without exception, the marginal effects of sovereign spread drivers (specifically, the variables that measure global market sentiment) increased during the crisis compared to the pre-crisis period, especially in peripheral countries. Moreover, the increase in the significance of the banking level of indebtedness and foreign bank's claims in the public sector (mainly in peripheral countries) along with the crisis unfolding seems to highlight the interconnection between private and public debt and thus, between banking and sovereign crises.

show abstract

Government bond risk premiums in the EU revisited: The impact of the financial crisis

Abstract: n o 1 1 5 2 / f e b r ua ry 2 0 1 0 WO R K I N G PA PE R S E R I E S This paper can be downloaded without charge fromIn 2010 all ECB publications feature a motif taken from the €500 banknote. Abstract 4 Non-technical summary 5 GOVERNMENT BOND RISK PREMIUMS

Cited by 191 publications

References 7 publications

The quest for banking stability in the euro area: The role of government interventions

The quest for banking stability in the euro area: The role of government interventions

The recent sovereign debt crisis in the Euro zone: A matter of fundamentals?

An update on EMU sovereign yield spread drivers in times of crisis: A panel data analysis

Contact Info

Product

Resources

About