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Sovereign bond market reactions to fiscal rules and no-bailout clauses – The Swiss experience

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Author Info

  • Lars P. Feld

    ()
    (Walter Eucken Institut & University of Freiburg)

  • Alexander Kalb

    ()
    (Bayern LB)

  • Marc-Daniel Moessinger

    ()
    (ZEW (Centre for European Economic Research))

  • Steffen Osterloh

    ()
    (German Council of Economic Experst)

Abstract

We investigate the political determinants of risk premiums which sub-national governments in Switzerland have to pay for their sovereign bond emissions. For this purpose we analyse financial market data from 288 tradable cantonal bonds in the period from 1981 to 2007. Our main focus is on two different institutional factors. First, many of the Swiss cantons have adopted strong fiscal rules. We find evidence that both the presence and the strength of these fiscal rules contribute significantly to lower cantonal bond spreads. Second, we study the impact of a credible no-bailout regime on the risk premia of potential guarantors. We make use of the Leukerbad court decision in July 2003 which relieved the cantons from backing municipalities in financial distress, thus leading to a fully credible no-bailout regime. Our results show that this break lead to a reduction of cantonal risk premia by about 25 basis points. Moreover, it cut the link between cantonal risk premia and the financial situation of the municipalities in its canton which existed before. This demonstrates that a not fully credible no-bailout commitment can entail high costs for the potential guarantor.

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Bibliographic Info

Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2013/27.

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Length: 37 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:ieb:wpaper:2013/6/doc2013-27

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Keywords: Sub-national government bonds; fiscal rules; no-bailout clause; sovereign risk premium;

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References

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Citations

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Cited by:
  1. Osterloh, Steffen & Heinemann, Friedrich & Kalb, Alexander, 2013. "Sovereign risk premia: The link between fiscal rules and stability culture," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80043, Verein für Socialpolitik / German Economic Association.
  2. E. Jenkner & Zhongjin Lu, 2014. "Sub-National Credit Risk and Sovereign Bailouts: Who Pays the Premium?," IMF Working Papers 14/20, International Monetary Fund.
  3. repec:hal:wpaper:hal-00870921 is not listed on IDEAS
  4. Merkus, Erik & Allers, Maarten, 2013. "Soft budget constraint but no moral hazard? The Dutch local government bailout puzzle," Research Report 13014-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  5. Lucio R. Pench, 2012. "Comment on "Fiscal Rules: Theoretical Issues and Historical Experiences"," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 526-529 National Bureau of Economic Research, Inc.
  6. Christoffel, Kai & Jaccard, Ivan & Kilponen, Juha, 2013. "Welfare and bond pricing implications of fiscal stabilization policies," Research Discussion Papers 32/2013, Bank of Finland.
  7. Simon Luechinger & Christoph Schaltegger, 2013. "Fiscal rules, budget deficits and budget projections," International Tax and Public Finance, Springer, vol. 20(5), pages 785-807, October.
  8. Heiko T. Burret & Lars P. Feld, 2014. "A Note on Budget Rules and Fiscal Federalism," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 12(1), pages 03-11, 04.
  9. Kirchgässner, Gebhard, 2013. "Fiscal Institutions at the Cantonal Level in Switzerland," Economics Working Paper Series 1304, University of St. Gallen, School of Economics and Political Science.
  10. Florian Chatagny, 2013. "Incentive Effects of Fiscal Rules on the Finance Minister’s Behaviour: Evidence from Revenue Projections in Swiss Cantons," KOF Working papers 13-347, KOF Swiss Economic Institute, ETH Zurich.

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