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On Creditor Seniority and Sovereign Bond Prices in Europe

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  • Sven Steinkamp
  • Frank Westermann

Abstract

The recent increase of interest rate spreads in Europe and their apparent detachment from underlying fundamental variables has generated a debate on multiple equilibria in the sovereign bond market (see De Grauwe and Ji (2012)). We critically evaluate this hypothesis, by pointing towards an alternative explanation: the increasing share of senior lenders (IMF, ECB, EFSF, etc.) in the total outstanding government debt of countries in crisis. We illustrate the close relationship between senior tranche lending – including Target2 balances – and recent developments in the sovereign bond market, both graphically and in a formal regression analysis.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3944.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3944

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Keywords: government bond spreads; Eurozone; senior tranche lending; multiple equilibria; sovereign debt crisis; Target2;

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References

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  1. Beirne, John & Fratzscher, Marcel, 2012. "The Pricing of Sovereign Risk and Contagion during the European Sovereign Debt Crisis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9249, C.E.P.R. Discussion Papers.
  2. Diego Saravia, 2009. "On The Role and Effects of IMF Seniority," Working Papers Central Bank of Chile, Central Bank of Chile 538, Central Bank of Chile.
  3. Hans-Werner Sinn & Timo Wollmershaeuser, 2011. "Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility," NBER Working Papers 17626, National Bureau of Economic Research, Inc.
  4. Michael Dooley & Mark R. Stone, 1993. "Endogenous Creditor Seniority and External Debt Values," IMF Staff Papers, Palgrave Macmillan, vol. 40(2), pages 395-413, June.
  5. Patrick Bolton & Olivier Jeanne, 2009. "Structuring and Restructuring Sovereign Debt: The Role of Seniority -super-1," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 879-902.
  6. Sturzenegger, Federico & Zettelmeyer, Jeromin, 2008. "Haircuts: Estimating investor losses in sovereign debt restructurings, 1998-2005," Journal of International Money and Finance, Elsevier, Elsevier, vol. 27(5), pages 780-805, September.
  7. Leonardo Bartolini & Avinash Dixit, 1991. "Market Valuation of Illiquid Debt and Implications for Conflicts among Creditors," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 828-849, December.
  8. Giancarlo Corsetti & Bernardo Guimaraes & Nouriel Roubini, 2003. "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance," NBER Working Papers 10125, National Bureau of Economic Research, Inc.
  9. Banerjee, A. & Marcellino, M. & Osbat, C., 2000. "Some Cautions on the Use of Panel Methods for Integrated Series of Macro-economic Data," Economics Working Papers, European University Institute eco2000/20, European University Institute.
  10. De Grauwe, Paul & Ji, Yuemei, 2012. "Self-Fulfilling Crises in the Eurozone: An Empirical Test," CEPS Papers, Centre for European Policy Studies 7085, Centre for European Policy Studies.
  11. Joshua Aizenman & Michael M. Hutchison & Yothin Jinjarak, 2011. "What is the Risk of European Sovereign Debt Defaults? Fiscal Space, CDS Spreads and Market Pricing of Risk," NBER Working Papers 17407, National Bureau of Economic Research, Inc.
  12. Joshua Aizenman & Kenneth M. Kletzer & Brian Pinto, 2005. "Sargent-Wallace meets Krugman-Flood-Garber, or: why sovereign debt swaps do not avert macroeconomic crises," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(503), pages 343-367, 04.
  13. repec:taf:jnlbes:v:30:y:2012:i:1:p:67-80 is not listed on IDEAS
  14. Paul De Grauwe & Yuemei Ji, 2012. "Self-Fulfilling Crises in the Eurozone. An Empirical Test," CAMA Working Papers 2012-37, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  15. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 46(2), pages 190-210, May.
  16. Paul De Grauwe & Yuemei Ji, 2012. "Self-Fulfilling Crises in the Eurozone. An Empirical Test," CESifo Working Paper Series 3821, CESifo Group Munich.
  17. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
  18. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, American Finance Association, vol. 31(2), pages 351-67, May.
  19. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
  20. Carlo Favero & Alessandro Missale, 2012. "Sovereign spreads in the eurozone: which prospects for a Eurobond?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 27(70), pages 231-273, 04.
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Citations

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Cited by:
  1. Niklas Potrafke & Markus Reischmann, 2014. "Explosive Target balances of the German Bundesbank," Ifo Working Paper Series Ifo Working Paper No. 185, Ifo Institute for Economic Research at the University of Munich.
  2. Valeriya Dinger & Sven Steinkamp & Frank Westermann, 2012. "The Tragedy of the Commons and Inflation Bias in the Euro Area," CESifo Working Paper Series 4036, CESifo Group Munich.
  3. De Grauwe, Paul & Ji,Yuemei, 2012. "What Germany should fear most is its own fear: An analysis of Target2 and current account imbalances," CEPS Papers, Centre for European Policy Studies 7280, Centre for European Policy Studies.
  4. Christoph M. Schmidt & Benjammin Weigert, 2013. "Weathering the Crisis and Beyond: Perspectives for the Euro Area," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0409, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  5. Ansgar Belke, 2013. "Non-Standard Monetary Policy Measures – Magic Wand or Tiger by the Tail?," Review of Economics, Lucius & Lucius, vol. 64(3), pages 341-364.
  6. Niels Gilbert & Jeroen Hessel & Silvie Verkaart, 2013. "Towards a Stable Monetary Union: What Role for Eurobonds?," DNB Working Papers, Netherlands Central Bank, Research Department 379, Netherlands Central Bank, Research Department.
  7. Maximilian Goedl & Joern Kleinert, 2013. "Interest rate spreads in the Euro area: fundamentals or sentiments?," Graz Economics Papers, University of Graz, Department of Economics 2013-04, University of Graz, Department of Economics.

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