EMU and the Renaissance of Sovereign Credit Risk Perception
AbstractWhat is the role of fiscal variables for the assessment of sovereign credit risk? Has this role changed over time? In the face of the financial crisis many OECD countries have experienced large increases of government debt relative to GDP. This has triggered a distinct response of financial markets reflected by a sharp rise of longterm interest on government bonds. We show that, in particular, within some member countries of the European Monetary Union the explanation of investors’ recent reactions to these fiscal imbalances is twofold: first, it is the worsening of fiscal positions due to the financial crisis that has been taken into account. Second, and more striking, it is financial markets’ reconsideration of the role of these fiscal fundamentals for the pricing of sovereign credit risk. We argue that, from a historical perspective, this recent re-evaluation of fiscal positions seems little surprising. It is rather the re-establishment of the temporarily interrupted pricing of fiscal imbalances as a central factor of sovereign credit risk than the aggravation of fiscal imbalances. In our study we provide cross-country evidence for the impact of fiscal imbalances upon long-term interest rates. We use macroeconomic data from 1980 to 2012 and contrast a panel of 22 OECD countries with 11 EMU member countries and the so called GIIPS countries. This comparably long time span allows us to evaluate the changes in sovereign risk pricing that set in with the start of the EMU. In particular, we find that the relationship between the perceived default risk reflected by long-term interest rates and the public debt to GDP ratio as an indicator of fiscal sustainability is time regime as well as regional cluster specific. Our findings suggest that there is a strong connection of institutional aspects of EMU and the relationship between fiscal imbalances and changes in the pricing of sovereign credit risk.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institut für Angewandte Wirtschaftsforschung (IAW) in its series IAW Discussion Papers with number 87.
Length: 22 pages
Date of creation: Jun 2012
Date of revision:
default risk; EMU; GIIPS; long-term interest rate; sovereign debt crisis;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-08-23 (All new papers)
- NEP-EEC-2012-08-23 (European Economics)
- NEP-MAC-2012-08-23 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Daniel Hoechle, 2007. "Robust standard errors for panel regressions with cross-sectional dependence," Stata Journal, StataCorp LP, vol. 7(3), pages 281-312, September.
- 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.
- Bernoth, Kerstin & Hagen, Jürgen von & Schuknecht, Ludger, 2006.
"Sovereign Risk Premiums in the European Government Bond Market,"
Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems
151, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2012. "Sovereign risk premiums in the European government bond market," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 975-995.
- Giavazzi, Francesco & Spaventa, Luigi, 2010. "Why the current account may matter in a monetary union: Lessons from the financial crisis in the Euro area," CEPR Discussion Papers 8008, C.E.P.R. Discussion Papers.
- David M. Drukker, 2003. "Testing for serial correlation in linear panel-data models," Stata Journal, StataCorp LP, vol. 3(2), pages 168-177, June.
- Gravelle, Toni, 1999.
"Liquidity of the Government of Canada Securities Market: Stylized Facts and Some Market Microstructure Comparisons to the United States Treasury Market,"
99-11, Bank of Canada.
- Toni Gravelle, 1999. "Liquidity of the Government of Canada Securities Market: Stylised Facts and Some Market Microstructure Comparisons to the United States Treasury Market," CGFS Papers chapters, in: Bank for International Settlements (ed.), Market Liquidity: Research Findings and Selected Policy Implications, volume 11, pages 1-37 Bank for International Settlements.
- M. Hashem Pesaran, 2004.
"General Diagnostic Tests for Cross Section Dependence in Panels,"
CESifo Working Paper Series
1229, CESifo Group Munich.
- Pesaran, M. Hashem, 2004. "General Diagnostic Tests for Cross Section Dependence in Panels," IZA Discussion Papers 1240, Institute for the Study of Labor (IZA).
- Pesaran, M.H., 2004. "‘General Diagnostic Tests for Cross Section Dependence in Panels’," Cambridge Working Papers in Economics 0435, Faculty of Economics, University of Cambridge.
- Manfred Gärtner & Björn Griesbach & Florian Jung, 2011.
"PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies,"
International Advances in Economic Research,
Springer, vol. 17(3), pages 288-299, August.
- Gärtner, Manfred & Griesbach, Bjoern & Jung, Florian, 2011. "PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies," Economics Working Paper Series 1106, University of St. Gallen, School of Economics and Political Science.
- De Grauwe, Paul, 2011. "Governance of a Fragile Eurozone," CEPS Papers 5523, Centre for European Policy Studies.
- Michael Frömmel & Robinson Kruse, 2009.
"Interest rate convergence in the EMS prior to European Monetary Union,"
CREATES Research Papers
2009-23, School of Economics and Management, University of Aarhus.
- M. Frömmel & R. Kruse, 2009. "Interest rate convergence in the EMS prior to European Monetary Union," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/610, Ghent University, Faculty of Economics and Business Administration.
- De Grauwe, Paul & Ji, Yuemei, 2012. "Mispricing of Sovereign Risk and Multiple Equilibria in the Eurozone," CEPS Papers 6548, Centre for European Policy Studies.
- Hans-Werner Sinn, 2012. "Die Target-Kredite der Deutschen Bundesbank," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 65, pages 03-34, 03.
- Thomas Laubach, 2003.
"New evidence on the interest rate effects of budget deficits and debt,"
Finance and Economics Discussion Series
2003-12, Board of Governors of the Federal Reserve System (U.S.).
- Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 858-885, 06.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rolf Kleimann).
If references are entirely missing, you can add them using this form.