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What Drives Sovereign Risk Premiums?: An Analysis of Recent Evidence from the Euro Area

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  • David Haugh
  • Patrice Ollivaud
  • David Turner
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    Abstract

    This paper analyses recent large movements in the yield spread for sovereign bonds as between Germany and other euro area countries. While the general increase in risk aversion that has characterised the financial crisis is an important factor on its own, it is found that this has also magnified the importance of fiscal performance, in particular as measured by the ratio of debt service to tax receipts and expected fiscal deficits. Moreover, there is evidence to suggest that such effects are non-linear, so that incremental deteriorations in fiscal performance lead to ever larger increases in the spread. These findings imply that financial market reaction could become an increasingly important constraint on fiscal policy for some countries, a feature which was much less apparent in the years prior to the financial crisis when general risk aversion was abnormally low. Quels sont les déterminants des primes de risque des États ? : Une analyse récente de la zone euro Cet article analyse les récents mouvements importants des écarts de taux des obligations d’État des pays de la zone euro avec l’Allemagne. L’augmentation généralisée de l’aversion au risque qui a accompagné la crise financière est un facteur important en soi. L’article montre en outre que ce phénomène a amplifié l’impact des performances budgétaires, en particulier quand elles sont mesurées par le ratio du service de la dette aux recettes fiscales et par les déficits budgétaires anticipés. De plus, ces effets se révèlent non linéaires, ce qui se traduit par le fait que les détériorations supplémentaires des performances budgétaires amènent à des augmentations toujours plus importantes des écarts de taux. Ces résultats suggèrent que les réactions des marchés financiers pourraient devenir une contrainte de plus en plus importante à la politique budgétaire de certains pays, une caractéristique qui était beaucoup moins visible durant les années antérieures à la crise où l’aversion générale au risque était anormalement basse.

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    Bibliographic Info

    Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 718.

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    Date of creation: 22 Jul 2009
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    Handle: RePEc:oec:ecoaaa:718-en

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    Keywords: fiscal policy; interest rate; debt; government bonds; deficit; bond market; obligations d’État; marché obligataire; taux d'intérêt; dette; politique budgétaire; déficit budgétaire;

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Spread de taux: risque de crédit, de liquidité et aversion au risque
      by contact@captaineconomics.fr (Le Captain') in Captain Economics on 2012-10-02 07:12:36
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    Cited by:
    1. Vyprachticka, Terezie, 2011. "Could the Stability and Growth Pact be Substituted by the Financial Markets?," European Integration online Papers (EIoP), European Community Studies Association Austria (ECSA-A), vol. 15, 09.
    2. António Afonso & Michael G. Arghyrou & Alexandros Kontonikas, 2012. "The determinants of sovereign bond yield spreads in the EMU," Working Papers 2012_14, Business School - Economics, University of Glasgow.
    3. Jaramillo, Laura & Weber, Anke, 2013. "Bond yields in emerging economies: It matters what state you are in," Emerging Markets Review, Elsevier, vol. 17(C), pages 169-185.
    4. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: Part 1. How Much is Needed and How to Reduce Debt to a Prudent Level?," OECD Economics Department Working Papers 932, OECD Publishing.
    5. Gabrisch, Hurbert & Orlowski, Lucjan & Pusch, Toralf, 2012. "Sovereign Default Risk in the Euro-Periphery and the Euro-Candidate Countries," Working Papers 2012002, Sacred Heart University, John F. Welch College of Business.
    6. Schuknecht, Ludger & von Hagen, Jürgen & Wolswijk, Guido, 2009. "Government Bond Risk Premiums in the EU revisited: The Impact of the Financial Crisis," CEPR Discussion Papers 7499, C.E.P.R. Discussion Papers.
    7. Kalteier, Eva-Maria & Posch, Peter N., 2013. "Sovereign asset values and implications for the credit market," Review of Financial Economics, Elsevier, vol. 22(2), pages 53-60.
    8. Patricia Crifo & Marc-Arthur Diaye & Rim Oueghlissi, 2014. "Measuring the eff ect of government ESG performance on sovereign borrowing cost," Working Papers hal-00951304, HAL.
    9. Borgy, V. & Laubach, T. & Mésonnier, J-S. & Renne, J-P., 2011. "Fiscal Sustainability, Default Risk and Euro Area Sovereign Bond Spreads Markets," Working papers 350, Banque de France.
    10. Van Hecke, Annelore, 2013. "Vertical debt spillovers in EMU countries," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 468-492.
    11. Ejsing, Jacob & Lemke, Wolfgang, 2011. "The Janus-headed salvation: Sovereign and bank credit risk premia during 2008-2009," Economics Letters, Elsevier, vol. 110(1), pages 28-31, January.
    12. Giancarlo Corsetti & Keith Kuester & Andre Meier & Gernot J. Muller, 2011. "Soverign risk and the effects of fiscal retrenchment in deep recessions," Working Papers 11-43, Federal Reserve Bank of Philadelphia.
    13. Edda Zoli & Silvia Sgherri, 2009. "Euro Area Sovereign Risk During the Crisis," IMF Working Papers 09/222, International Monetary Fund.
    14. Luciana Barbosa & Sónia Costa, 2010. "Determinants of sovereign bond yield spreads in the euro area in," Working Papers w201022, Banco de Portugal, Economics and Research Department.

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