Sovereign risk premia: The link between fiscal rules and stability culture

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Non-technical summaryThe credibility crisis regarding the sustainability of public debt has transformed the markets for government bonds in the Euro area. A new sensitivity of creditors for the risk of sovereign default has pushed up financing costs of several euro member countries or has even cut them off from market access. Currently, policy makers try to enhance their fiscal reputation through the establishment of better European and national fiscal rules, particular in form of the debt brakes prescribed by the European Fiscal Compact. The hope is that, independent from the current budgetary performance, new fiscal rules send out credible signals to the markets and cut short the way towards lowering the risk spread.In our paper we study the determinants of sovereign risk premia in the EU countries between 1992 and 2008. Our contribution addresses two interrelated questions: First, do fiscal rules impact on sovereign risk premia in Europe? And second, is any such observable link really causal or rather the consequence of different national "stability cultures", which arise from differing historical institutions or fiscal preferences?In our empirical analysis, we try to shed light on this issue by employing several types of stability preference related proxies. These proxies are related to a country's past stability performance, government characteristics and survey results related to general trust. We find evidence that these indicators have an influence on risk premia. Moreover, they dampen the measurable impact of fiscal rules on risk premia. The estimated positive effect of fiscal rules on market confidence in the early years of EMU can thus mainly be explained by the fact that mainly high-stability countries introduced such constraints. Our results indicate that these stability-oriented countries would not have had a significantly lower financial market reputation if they had not established fiscal rules. Thus, for these countries strict fiscal rules may be rather interpreted as a confirmation of the underlying fiscal preferences of the voters and their political representatives. Still, even if this is true, it does not preclude the possibility that the new establishment of strict rules -such as intended by the Fiscal Compact -is relevant for fiscal reputation in countries with a lack of historical stability orientation. Our results rather point to the fact that fiscal rules have the largest potential for countries with particularly poor stability culture ...

Fiscal Rules and the Sovereign Default Premium

“…A number of empirical studies analyze the relationship between fiscal rules and fiscal policy (for instance, Poterba (1996) reviews the literature for U.S. states, and Debrun et al (2008) present evidence for Europe) and between fiscal rules and the government's financing costs (see, for example, Eichengreen and Bayoumi (1994), Heinemann et al (2011), Iara and Wolff (2011), Lowry and Alt (2001, and Poterba and Rueben (1999)). However, difficulties in identifying the effects of fiscal rules are well documented (see, for instance, Poterba (1996) andHeinemann et al (2011)).…”

“…However, difficulties in identifying the effects of fiscal rules are well documented (see, for instance, Poterba (1996) andHeinemann et al (2011)). We measure these effects through the lens of a default model.…”

Palestine Banks Sector Ability to Apply Credit Risk Management According to Basel III

“…Moreover, developing customer information systems and credit portfolios of the previous years. Also, providing human resources so as to enhance the capital adequacy "bank solvency" [17,18]. Since the strongly capitalized banks which are managed by good managements have the ability to face losses and grant credit to their clients and business facilities through business cycle "economic volatility," and this helps to strengthen public confidence in banking system.…”

El impacto de la crisis en la industria cinematográfica en Europa

“…En el primero están comprendidos los de Silbey (2009), Dal Pozzolo y Bollo (2009), Santagata y Bertac chini (2011), Doyle (2012), Heinemann et. al.…”