Euro area sovereign risk during the crisis (original) (raw)
Sovereign default Risk in the Euro-Periphery and the Euro-Candidate Countries
Available at SSRN 2145780, 2012
This study examines the key drivers of sovereign default risk in five euro area periphery countries and three euro-candidates that are currently pursuing independent monetary policies. We argue that the recent proliferation of sovereign risk premiums stems from both domestic and international sources. We focus on contagion effects of external financial crisis on sovereign risk premiums in these countries, arguing that the countries with weak fundamentals and fragile financial institutions are particularly vulnerable to such effects. The domestic fiscal vulnerabilities include: economic recession, less efficient government spending and a rising public debt. External ‘push’ factors entail increasing liquidity- and counter-party risks in international banking, as well as risk-hedging appetites of international investors embedded in local currency depreciation against the US Dollar. We develop a model capturing the internal and external determinants of sovereign risk premiums and test for the examined country groups. The results lead us to caution against premature fiscal consolidation in the aftermath of the global economic crisis, since such policy might actually worsen sovereign default risk. The model works well for the euro-periphery countries; it is less robust for the euro-candidates that upon a future euro adoption will have to pursue real economy growth oriented policies in order to mitigate a potential increase in sovereign default risk.
Fiscal and financial determinants of Eurozone sovereign spreads
Economics Letters, 2012
The relationship between fiscal and financial euro area indicators and sovereign yield spreads has changed after the start of the financial crisis. Increased financial volatility has magnified the impact of fiscal conditions as drivers of sovereign risk, has widened the set of macroeconomic determinants, and has caused substantial interactions between fiscal and financial variables.
Fiscal Discipline as a Driver of Sovereign Risk Spread in the European Union Coutries
The aim of the paper is to examine if stronger fiscal discipline effects sovereign risk premium in the European Union member states in a period 1990-2011. We understand fiscal discipline as a compliance with targets for budgetary aggregates. We performed estimation on three different panels (EU24, EURO, nonEURO) with the goal to find differences between euro and non-euro countries. We used next variables for testing the impact on sovereign bond spread: German Bunds' interest, budget balance, debt and the fiscal rules index. Correlation analysis identified the strong correlation between sovereign yield spread and budget balance. This is the common trend for all panels. Likewise, fiscal rules index is strong correlated with spread and it is more noticeable in EURO panel. The improvement of fiscal discipline reduces sovereign yield spreads. The biggest difference between panels was found for the debt and German interest rate. These variables are strong correlated only in EURO count...
The sovereign debt crisis and the euro area
2013
This publication collects the papers presented at the workshop entitled "The sovereign debt crisis and the euro area", held at the Bank of Italy in Rome on 15 February 2013. In recent years the Economic Research and International Relations Area of the Bank of Italy has conducted several analyses on the impact of the sovereign debt crisis on the financial system and the economy in Italy and other euro-area countries. The workshop provided a first opportunity to discuss the results of those analyses with representatives of the academic world. The volume comprises three sections, which examine the main mechanisms whereby the tensions in the government bond markets due to the sovereign debt crisis were transmitted to the banking system and then to the real economy.
Sovereign Risk, European Crisis Resolution Policies and Bond Yields
SSRN Electronic Journal, 2000
We study the e¤ects of a wide range of European crisis resolution policies, including large scale asset purchase programs of the ECB, on 10-year sovereign bond spreads of seven European countries. Our results based on daily data on bond spreads suggests that policies that are directly geared towards easing the funding strains of the sovereigns and improving market liquidity have been most e¤ective in calming the European sovereign markets. Quantitatively the largest e¤ects on bond spreads are due to announcements of ECB's SMP program and OMTs. At the same time, announcements of …nancial assistant programmes have typically increased somewhat the perceived riskiness of long term bonds in the guarantor countries but reduced the bond spreads in the countries receiving funding.
Determinants of intra-euro area government bond spreads during the financial crisis
European Economy- …, 2009
De t e r mi n a n t s o f i n t r a -e u r o a r e a g o v e r n me n t b o n d s p r e a d s d u r i n g t h e f i n a n c i a l c r i s i s S a l v a d o r B a r r i o s , P e r I v e r s e n , Ma g d a l e n a L e wa n d o ws k a a n d R a l p h S e t z e r E c o n o mi c P a p e r s 3 8 8 | No v e mb e r 2 0 0 9 E U R OP E AN E CONOMY
Sovereign Risk Premia in the Euro Area and the Role of Contagion
This work estimates a reduced model of the determinants of the 10-year yield spreads relative to Germany for 10 Eurozone countries. Results show that since the inception of the 2007 crisis, spreads have exhibited a rising time-dependent component. Country specific estimated responses to financial turmoil highlight three major results. Core countries have not been affected by financial contagion during the subprime crisis, and from 2011 onwards, they have benefited from government yield spreads that are lower than what is explainable by the underlying fundamentals. Peripheral member countries (except Italy) – which from the outset of the EMU benefited from underpricing of their economic and fiscal fragility due to the implicit bailout insurance – have suffered from a revision of market expectations since 2010. Italy, penalised by its historically high debt-to-GDP ratio, has been hit by a rising contagion effect since 2010, which is estimated to account for 180 b.p. of the spread observable in the 1st semester of 2012.
What Drives Sovereign Risk Premiums?: An Analysis of Recent Evidence from the Euro Area
Oecd Economics Department Working Papers, 2009
JT03268148 Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format ECO/WKP(2009)59 Unclassified English -Or. English ECO/WKP(2009)59 2 ABSTRACT/RÉSUMÉ What drives sovereign risk premiums? An analysis of recent evidence from the euro area
Chronic sovereign debt crises in the Eurozone, 2010-2012
Two years after the rescue package for Greece provided by the European Union and the International Monetary Fund in May 2010, sovereign debt crises continue to threaten a growing number of countries in the eurozone. We develop a theory for analyzing these crises based on the research of Cole and Kehoe (1996, 2000) and Conesa and Kehoe (2012). In this theory, the need to frequently sell large quantities of bonds leaves a country vulnerable to sovereign debt crisis. This vulnerability provides a strong incentive to the country’s government to run surpluses to pay down its debt to a level where a crisis is not possible. ; A deep and prolonged recession, like those currently afflicting many eurozone countries, creates a conflicting incentive, however, to “gamble for redemption”—to bet that the recession will soon end, to sell more bonds in order to smooth government spending, and, if indeed the economy recovers, to reduce debt. Under some circumstances, this policy is the best that a go...
The recent sovereign debt crisis in the Euro zone: A matter of fundamentals?
Acta Oeconomica, 2015
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 sha...
Looking beyond the euro area sovereign debt crisis
World Bank Publications, 2012
The euro area sovereign debt crisis currently playing out has forced the international policy community to come to grips with the changing nature of sovereign risk in advanced economies. In addition to the straightforward elevated risk levels brought about by the financial crisis and the Great Recession of 2008-9, other long-term structural factors are reshaping the sovereign risk environment in advanced economies-namely, rising health care and pension costs in the face of aging populations and a broadening global investor base that now includes the private sector, the public sector, and financial institutions in domestic and foreign markets. Coping with higher levels of sovereign credit risk in advanced countries with international currency status (whose debt traditionally has been considered free of credit risk) will require fundamental changes in market practice and policy. Investors will need to revise their analytical processes to factor in the possibility that a sovereign could fail to service its debt obligations in time and in full. Policy makers, for their part, must
Journal of Financial Management, Markets and Institutions (ISSN 2282-717X) Fascicolo 1, gennio-giugno 2013 Copyright c by Società editrice il Mulino, Bologna. Tutti i diritti sono riservati. Per altre informazioni si veda https://www.rivisteweb.it Licenza d'uso L'articolò e messo a disposizione dell'utente in licenza per uso esclusivamente privato e personale, senza scopo di lucro e senza fini direttamente o indirettamente commerciali. Salvo quanto espressamente previsto dalla licenza d'uso Rivisteweb, ` e fatto divieto di riprodurre, trasmettere, distribuire o altrimenti utilizzare l'articolo, per qualsiasi scopo o fine. Tutti i diritti sono riservati. Abstract This work estimates a reduced model of the determinants of the 10-year yield spreads relative to Germany for 10 Eurozone countries. Results show that since the inception of the 2007 crisis, spreads have exhibited a rising time-dependent component. Country specific estimated responses to financial turmoil ...
Marketing ì menedžment ìnnovacìj, 2018
The financing cost per unit of sovereign debt shows a significant difference in individual EU member-states. This article tries to find an explanation for this. As one of the reasons, it explores the phenomenon that in the wake of the financial crisis sovereign risk has become a factor seriously affecting interest rates both in the Euro-zone countries and the countries having their own currencies. The average interest cost is also affected by the choice of the countries to give priority to either cost or risk minimisation in their sovereign debt management strategies.
Sovereign risk premiums in the European government bond market
Journal of International Money and Finance, 2012
This paper provides a study of bond yield differentials among EU government bonds issued between 1993 and 2005 on the basis of a unique dataset of issue spreads in the US and DM (Euro) bond market. Interest differentials between bonds issued by EU countries and Germany or the USA contain risk premiums which increase with fiscal imbalances and depend negatively on the issuer's relative bond market size. The start of the European Monetary Union has shifted market attention to debt service payments as the key measure of indebtedness and eliminated liquidity premiums in the euro area.
A retrospective look at sovereign bond dynamics in the euro area
2019
This section looks back at sovereign bond dynamics in the euro area over the past two decades, taking stock of both the price and flow dimensions. As regards cross-border flows, the 2008 crisis appears to have provoked, amongst its more immediate effects, investment fund outflows from EU bond markets. The years of the subsequent Great Recession witnessed a mutual retrenchment in the US and the EU from each other's international debt markets. At the same time, debt flow dynamics within the euro area largely reversed when compared with the pre-crisis period, with the countries more severely affected by the crisis experiencing outflows, as less vulnerable countries pulled back their cross-border debt investments. As regards bond prices, the crisis period was characterised by highly asymmetric dynamics across groups of euro area countries which – according to model-based results – appear to have been largely driven by differences in debt ratios, bouts of illiquidity and divergent ma...
THE SOVEREIGN DEBT CHALLANGE: AN OVERVIEW
2011
Recent years have seen profound changes in country risk and its components, in the context of crises multiplication and diversification; the sovereign risk, a main country risk component, has undergone important changes, mainly given by mutations in its determining factors; the economy of "indebtedness" represents a reality of the recent years. In this context, our paper aims to capture new issues related to sovereign risk and its manifestations, and to bring to the fore a number of relevant indicators concerning the indebtedness problems. Currently, the increasing sovereign obligations, the Greece 2010 episode and the real sovereign debt crisis testify the important implications that the national economic policy decisions have on entire nations. In general, the countries with servicing difficulties present a total external or public debt that overcomes the average of the emerging states; however, we can not accurately identify a threshold beyond which we can say that a state is overly indebted. Therefore, questions such as "Starting from what point is a state overly indebted?" or "What is the cause of the excessive debts of a state?" are fully justified and the answer or answers deserve being sought. Studies on the relationship between various economic variables and the countries ability to deal with external debt problems are present in the country risk literature since the 1970s; beginning with authors such as Frank and Cline (1971), which gave priority to external debt service indicators such as Exports, Imports / GDP, Imports / Reserves, and continuing with other specialists, among whom we mention many others, many ratios and indicators were carefully analyzed. In our short study, we also present a number of recent aspects concerning sovereign risk, and we analyze some relevant indicators, using statistical data, for four countries: Romania, Greece, Hungary and Bulgaria. We underline the fact that, even if sovereign risk indicators are in the good intervals, the crisis risk remains present, especially because of the liquidity issues. For us, this brief paper opens the way for a much broader study, which aims to develop a model of sovereign risk analysis, the dependent variable, the probability of default, being explained by the evolution of the selected relevant indicators.
Systemic risk, sovereign yields and bank exposures in the euro crisis
Economic Policy, 2014
Since 2008, eurozone sovereign yields have diverged sharply, and so have the corresponding credit default swap (CDS) premia. At the same time, banks' sovereign debt portfolios have featured an increasing home bias. In this paper, we investigate the relationship between these two facts, and its rationale. First, we inquire to what extent the dynamics of sovereign yield differentials relative to the swap rate and CDS premia reflect changes in perceived sovereign solvency risk or rather different responses to systemic risk due to the possible collapse of the euro. We do so by decomposing yield differentials and CDS spreads in a country-specific and a common risk component via a dynamic factor model. We then investigate how the home bias of banks' sovereign portfolios responds to yield differentials and to their two components, by estimating a vector error-correction model on 2007-13 monthly data. We find that in most countries of the eurozone, and especially in its periphery, banks' sovereign exposures respond positively to increases in yields. When bank exposures are related to the country and common risk components of yields, it turns out that (1) in the periphery, banks increase their domestic exposure in response to increases in country risk, while in core countries they do not; (2) in most eurozone countries banks respond to an increase in the common risk factor by raising their domestic exposures. Finding (1) suggests distorted incentives in periphery banks' response to changes in their own sovereign's risk. Finding indicates that, when systemic risk increases, all banks tend to increase the home bias of their portfolios, making the eurozone sovereign market more segmented. --Niccol o Battistini, Marco Pagano and Saverio Simonelli S y s t e m i c r i s k Economic Policy April 2014 Printed in Great Britain