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Sovereign Risk Premia and the International Balance Sheet: Lessons from the European Crisis

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  • Benedetta Bianchi

    (Trinity College Dublin)

Abstract

The external dimension has emerged as an important factor in the euro debt crisis. The crisis has also shown that fluctuations in risk premia can be dramatic. We investigate the relevance of the net international investment position for sovereign risk perception and the role of market uncertainty in this relation. Furthermore, we ask whether the composition of net external assets, in terms of debt and equity instruments, is relevant in explaining sovereign risk premia and their fluctuations in time. We find that both public debt and NIIP are subject to fluctuations in risk premia; the external variable is more sensitive to the uncertainty of future expectations, and net external debt is what drives this result. Net foreign debt liabilities are associated with a lower government bond yield spread when market optimism justifies their presence with high future growth patterns; however, it becomes an important risk factor for sovereigns when global uncertainty increases and the capacity to repay foreign debt becomes a concern. Portfolio equity and FDI are related to sovereign risk in a stable manner, while a given amount of net external debt can be associated with government yield spread spikes as high as 4 %.

Suggested Citation

  • Benedetta Bianchi, 2016. "Sovereign Risk Premia and the International Balance Sheet: Lessons from the European Crisis," Open Economies Review, Springer, vol. 27(3), pages 471-493, July.
  • Handle: RePEc:kap:openec:v:27:y:2016:i:3:d:10.1007_s11079-015-9382-8
    DOI: 10.1007/s11079-015-9382-8
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    Cited by:

    1. Emilia Gyoerk, 2017. "Economic Costs and Benefits of EMU Membership from the Perspective of a Non-member," Open Economies Review, Springer, vol. 28(5), pages 893-921, November.

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    More about this item

    Keywords

    Sovereign risk; Net foreign assets; European Monetary Union; Risk premia;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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