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EMU, the changing role of public debt and the revival of sovereign credit risk perception

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  • Schmid, Kai Daniel
  • Schmidt, Michael

Abstract

Using annual data for 21 OECD countries we provide evidence of remarkable mispricing of sovereign bonds for the so-called GIIPS countries before the start of the financial crisis. Our results also qualify the view of pronounced overpricing in the crisis. In detail, we find: (i) Since the 1980s the role of public debt for the pricing of government bonds has changed twice: First-time in the aftermath of the signing of the Maastricht treaty, and again with the wake-up call due to the onset of the financial crisis. (ii) Before the financial crisis EMU member countries had de facto been perceived as a homogenous group with regard to the role of public debt for sovereign risk pricing. (iii) With the reconsideration of country-specific fundamentals the role of public debt has not only been revived but its impact upon bond yield spreads has become comparable to the time before the Maastricht treaty. --

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Bibliographic Info

Paper provided by University of Tuebingen, Faculty of Economics and Social Sciences in its series University of Tuebingen Working Papers in Economics and Finance with number 48.

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Date of creation: 2012
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Handle: RePEc:zbw:tuewef:48

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Keywords: EMU; GIIPS; public debt; risk perception; sovereign bond yields;

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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. Gravelle, Toni, 1999. "Liquidity of the Government of Canada Securities Market: Stylized Facts and Some Market Microstructure Comparisons to the United States Treasury Market," Working Papers, Bank of Canada 99-11, Bank of Canada.
  3. Kopf, Christian, 2011. "Restoring financial stability in the euro area," CEPS Papers, Centre for European Policy Studies 4292, Centre for European Policy Studies.
  4. Daniel Hoechle, 2007. "Robust standard errors for panel regressions with cross-sectional dependence," Stata Journal, StataCorp LP, StataCorp LP, vol. 7(3), pages 281-312, September.
  5. 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.
  6. 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, Ghent University, Faculty of Economics and Business Administration 09/610, Ghent University, Faculty of Economics and Business Administration.
  7. 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.
  8. 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.
  9. David M. Drukker, 2003. "Testing for serial correlation in linear panel-data models," Stata Journal, StataCorp LP, StataCorp LP, vol. 3(2), pages 168-177, June.
  10. Arghyrou, Michael G. & Kontonikas, Alexandros, 2010. "The EMU sovereign-debt crisis: Fundamentals, expectations and contagion," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-81, Scottish Institute for Research in Economics (SIRE).
  11. Miguel A. Segoviano Basurto & Carlos Caceres & Vincenzo Guzzo, 2010. "Sovereign Spreads," IMF Working Papers 10/120, International Monetary Fund.
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