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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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Cited by:
  1. Merkus, Erik & Allers, Maarten, 2013. "Soft budget constraint but no moral hazard? The Dutch local government bailout puzzle," Research Report, University of Groningen, Research Institute SOM (Systems, Organisations and Management) 13014-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  2. Gebhard Kirchgässner, 2013. "Fiscal Institutions at the Cantonal Level in Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), Swiss Society of Economics and Statistics (SSES), vol. 149(II), pages 139-166, June.
  3. Heinemann, Friedrich & Osterloh, Steffen & Kalb, Alexander, 2014. "Sovereign risk premia: The link between fiscal rules and stability culture," Journal of International Money and Finance, Elsevier, Elsevier, vol. 41(C), pages 110-127.
  4. Florian Chatagny, 2013. "Incentive Effects of Fiscal Rules on the Finance Minister’s Behaviour: Evidence from Revenue Projections in Swiss Cantons," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 13-347, KOF Swiss Economic Institute, ETH Zurich.
  5. 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, Ifo Institute for Economic Research at the University of Munich, vol. 12(1), pages 03-11, 04.
  6. Christoffel, Kai & Jaccard, Ivan & Kilponen, Juha, 2013. "Welfare and bond pricing implications of fiscal stabilization policies," Research Discussion Papers, Bank of Finland 32/2013, Bank of Finland.
  7. E. Jenkner & Zhongjin Lu, 2014. "Sub-National Credit Risk and Sovereign Bailouts: Who Pays the Premium?," IMF Working Papers, International Monetary Fund 14/20, International Monetary Fund.
  8. Lucio R. Pench, 2012. "Comment on "Fiscal Rules: Theoretical Issues and Historical Experiences"," NBER Chapters, National Bureau of Economic Research, Inc, in: Fiscal Policy after the Financial Crisis, pages 526-529 National Bureau of Economic Research, Inc.
  9. Simon Luechinger & Christoph Schaltegger, 2013. "Fiscal rules, budget deficits and budget projections," International Tax and Public Finance, Springer, Springer, vol. 20(5), pages 785-807, October.
  10. repec:hal:wpaper:hal-00870921 is not listed on IDEAS

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