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Sovereign Reputation and Yield Spreads: A Case Study on Retroactive Legislation

Author

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  • Randl Otto

    (WU Vienna University of Economics and Business,Vienna, Austria)

  • Zechner Josef

    (WU Vienna University of Economics and Business,Vienna, Austria)

Abstract

This paper uses recent legislation in Austria to establish a link between sovereign reputation and yield spreads. In 2009, Hypo Alpe Adria International, a bank previously co-owned by the regional government of Carinthia, had been nationalized by Austria’s central government in order to avoid a default triggering multi-billion Euro local government guarantees. In 2015, special legislation retroactively introduced collective action clauses allowing a haircut on both the bonds and the guarantees while avoiding formal default. We document that legislative and administrative action designed to partly abrogate the guarantees resulted in a loss of reputation, leading to higher yield spreads for sovereign debt. Our analysis of covered bonds uncovers an increase in yield spreads on the secondary market and a deterioration of primary market conditions.

Suggested Citation

  • Randl Otto & Zechner Josef, 2018. "Sovereign Reputation and Yield Spreads: A Case Study on Retroactive Legislation," German Economic Review, De Gruyter, vol. 19(3), pages 260-279, August.
    • Handle: RePEc:bpj:germec:v:19:y:2018:i:3:p:260-279
    DOI: 10.1111/geer.12128
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    2. Jelic, Ranko & Zeng, Yiming & Karouzakis, Nikolaos, 2023. "Foreign-law premium for European high-yield corporate bonds," Finance Research Letters, Elsevier, vol. 52(C).
    3. Chamon, Marcos & Schumacher, Julian & Trebesch, Christoph, 2018. "Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs?," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 114, pages 164-179.

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