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European Sovereign Bailouts, Political Risk And The Economic Consequences Of Mrs. Merkel

Author

Listed:
  • STEFAN COLLIGNON

    (Scuola Superiore Sant'Anna, DIRPOLIS, Piazza Martiri della Libertà 33, 56127 Pisa (IT), Italy)

  • PIERO ESPOSITO

    (Scuola Superiore Sant'Anna, DIRPOLIS, Piazza Martiri della Libertà 33, 56127 Pisa (IT), Italy)

  • HANNA LIERSE

    (Jacobs University, Campus Ring 1, 28759 Bremen (DE), Germany)

Abstract

The European economy was hit by a confidence shock in 2009 when the Greek government of Papandreou discovered the true amount of public deficit. The subsequent loss of trust in European fiscal governance reduced financial markets' willingness to lend to indebted governments. The European Union established the Financial Stability Facility to support debt-ridden states but without lasting success. The continuously rising Greek bond yields suggest that the information transmitted from political leaders did not reduce investors' risk perceptions. We develop a theoretical framework, in which financial market participants do not know the real rate of return on Greek assets but infer it from the signals emitted by informed European governments. Based on a unique news dataset, we investigate the impact of good and bad news from the European institutions on the Greek interest spread. The results demonstrate that the noise around the European decision-making process substantially raised the bailout cost.

Suggested Citation

  • Stefan Collignon & Piero Esposito & Hanna Lierse, 2013. "European Sovereign Bailouts, Political Risk And The Economic Consequences Of Mrs. Merkel," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 4(02), pages 1-25.
    • Handle: RePEc:wsi:jicepx:v:04:y:2013:i:02:n:s1793993313500105
    DOI: 10.1142/S1793993313500105
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    References listed on IDEAS

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    1. Buiter, Willem, 2008. "Can Central Banks Go Broke?," CEPR Discussion Papers 6827, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Cristi Spulbar & Mihai Nitoi, 2012. "The Impact Of Political And Economic News On The Euro/Ron Exchange Rate: A Garch Approach," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 4, pages 52-58, December.
    2. Stefan Collignon & Sebastian Diessner, 2016. "The ECB's Monetary Dialogue with the European Parliament: Efficiency and Accountability during the Euro Crisis?," Journal of Common Market Studies, Wiley Blackwell, vol. 54(6), pages 1296-1312, November.
    3. Collignon, Stefan & Diessner, Sebastian, 2016. "The ECB's monetary dialogue with the European Parliament:efficiency and accountability during the Euro crisis?," LSE Research Online Documents on Economics 67308, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Sovereign debt bailout; Euro Area; Greek crisis; political communication; Garch models; D82; E61; F36; C58; G15; H63;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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