EMU and the Renaissance of Sovereign Credit Risk Perception
What is the role of fiscal variables for the assessment of sovereign credit risk? Has this role changed over time? In the face of the financial crisis many OECD countries have experienced large increases of government debt relative to GDP. This has triggered a distinct response of financial markets reflected by a sharp rise of longterm interest on government bonds. We show that, in particular, within some member countries of the European Monetary Union the explanation of investors’ recent reactions to these fiscal imbalances is twofold: first, it is the worsening of fiscal positions due to the financial crisis that has been taken into account. Second, and more striking, it is financial markets’ reconsideration of the role of these fiscal fundamentals for the pricing of sovereign credit risk. We argue that, from a historical perspective, this recent re-evaluation of fiscal positions seems little surprising. It is rather the re-establishment of the temporarily interrupted pricing of fiscal imbalances as a central factor of sovereign credit risk than the aggravation of fiscal imbalances. In our study we provide cross-country evidence for the impact of fiscal imbalances upon long-term interest rates. We use macroeconomic data from 1980 to 2012 and contrast a panel of 22 OECD countries with 11 EMU member countries and the so called GIIPS countries. This comparably long time span allows us to evaluate the changes in sovereign risk pricing that set in with the start of the EMU. In particular, we find that the relationship between the perceived default risk reflected by long-term interest rates and the public debt to GDP ratio as an indicator of fiscal sustainability is time regime as well as regional cluster specific. Our findings suggest that there is a strong connection of institutional aspects of EMU and the relationship between fiscal imbalances and changes in the pricing of sovereign credit risk.
|Date of creation:||Jun 2012|
|Date of revision:|
|Contact details of provider:|| Postal: Ob dem Himmelreich 1, D-72074 Tübingen|
Phone: (+49) 7071 98 96 -0
Fax: (+49) 7071 98 96 -99
Web page: http://www.iaw.edu/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- repec:kap:iaecre:v:17:y:2011:i:3:p:288-299 is not listed on IDEAS
- 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
09/610, Ghent University, Faculty of Economics and Business Administration.
- Frömmel, Michael & Kruse, Robinson, 2015. "Interest rate convergence in the EMS prior to European Monetary Union," Journal of Policy Modeling, Elsevier, vol. 37(6), pages 990-1004.
- Michael Frömmel & Robinson Kruse, 2009. "Interest rate convergence in the EMS prior to European Monetary Union," CREATES Research Papers 2009-23, Department of Economics and Business Economics, Aarhus University.
- Francesco Caselli, 1998.
"Fiscal Discipline and the Cost of Public Debt Service; Some Estimates for OECD Countries,"
IMF Working Papers
98/55, International Monetary Fund.
- Ardagna Silvia & Caselli Francesco & Lane Timothy, 2007. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-35, August.
- Silvia Ardagna & Francesco Caselli & Timothy Lane, 2004. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," NBER Working Papers 10788, National Bureau of Economic Research, Inc.
- Ardagna, Silvia & Lane, Timothy & Caselli, Francesco, 2007. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," Scholarly Articles 2579739, Harvard University Department of Economics.
- Ardagna, Silvia & Caselli, Francesco & Lane, Timothy, 2004. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," CEPR Discussion Papers 4661, C.E.P.R. Discussion Papers.
- Silvia Ardagna & Francesco Caselli & Timothy Lane, 2005. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," CEP Discussion Papers dp0670, Centre for Economic Performance, LSE.
- Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2012.
"Sovereign risk premiums in the European government bond market,"
Journal of International Money and Finance,
Elsevier, vol. 31(5), pages 975-995.
- Bernoth, Kerstin & Hagen, Jürgen von & Schuknecht, Ludger, 2006. "Sovereign Risk Premiums in the European Government Bond Market," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 151, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Francesco Giavazzi & Luigi Spaventa, 2011.
"Why the current account may matter in a monetary union. Lesson from the financial crisis in the Euro area,"
426, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Giavazzi, Francesco & Spaventa, Luigi, 2010. "Why the current account may matter in a monetary union: Lessons from the financial crisis in the Euro area," CEPR Discussion Papers 8008, C.E.P.R. Discussion Papers.
- Hans-Werner Sinn, 2012. "Die Target-Kredite der Deutschen Bundesbank," Ifo Schnelldienst, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 65, pages 03-34, 03.
- Pesaran, M. Hashem, 2004.
"General Diagnostic Tests for Cross Section Dependence in Panels,"
IZA Discussion Papers
1240, Institute for the Study of Labor (IZA).
- M. Hashem Pesaran, 2004. "General Diagnostic Tests for Cross Section Dependence in Panels," CESifo Working Paper Series 1229, CESifo Group Munich.
- Pesaran, M.H., 2004. "‘General Diagnostic Tests for Cross Section Dependence in Panels’," Cambridge Working Papers in Economics 0435, Faculty of Economics, University of Cambridge.
- Thomas Laubach, 2003.
"New evidence on the interest rate effects of budget deficits and debt,"
Finance and Economics Discussion Series
2003-12, Board of Governors of the Federal Reserve System (U.S.).
- Thomas Laubach, 2009. "New Evidence on the Interest Rate Effects of Budget Deficits and Debt," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 858-885, 06.
- Gravelle, Toni, 1999.
"Liquidity of the Government of Canada Securities Market: Stylized Facts and Some Market Microstructure Comparisons to the United States Treasury Market,"
Staff Working Papers
99-11, Bank of Canada.
- Toni Gravelle, 1999. "Liquidity of the Government of Canada Securities Market: Stylised Facts and Some Market Microstructure Comparisons to the United States Treasury Market," CGFS Papers chapters, in: Bank for International Settlements (ed.), Market Liquidity: Research Findings and Selected Policy Implications, volume 11, pages 1-37 Bank for International Settlements.
- De Grauwe, Paul, 2011. "Governance of a Fragile Eurozone," CEPS Papers 5523, Centre for European Policy Studies.
- David Haugh & Patrice Ollivaud & David Turner, 2009. "What Drives Sovereign Risk Premiums?: An Analysis of Recent Evidence from the Euro Area," OECD Economics Department Working Papers 718, OECD Publishing.
- De Grauwe, Paul & Ji, Yuemei, 2012. "Mispricing of Sovereign Risk and Multiple Equilibria in the Eurozone," CEPS Papers 6548, Centre for European Policy Studies.
- 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.
- Breusch, T.S. & Pagan, A.R., .
"The Lagrange multiplier test and its applications to model specification in econometrics,"
CORE Discussion Papers RP
412, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- T. S. Breusch & A. R. Pagan, 1980. "The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics," Review of Economic Studies, Oxford University Press, vol. 47(1), pages 239-253.
- Daniel Hoechle, 2007. "Robust standard errors for panel regressions with cross-sectional dependence," Stata Journal, StataCorp LP, vol. 7(3), pages 281-312, September.
- David M. Drukker, 2003. "Testing for serial correlation in linear panel-data models," Stata Journal, StataCorp LP, vol. 3(2), pages 168-177, June.
When requesting a correction, please mention this item's handle: RePEc:iaw:iawdip:87. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rolf Kleimann)
If references are entirely missing, you can add them using this form.