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“Increasing contingent guarantees: The asymmetrical effect on sovereign risk of different government interventions"

Author

Listed:
  • Manish K. Singh

    () (Department of Management Studies, Indian Institute of Technology Delhi, India)

  • Marta Gómez-Puig

    () (Department of Economics & Riskcenter, Universitat de Barcelona, Spain)

  • Simón Sosvilla-Rivero

    () (Complutense Institute of Economic Analysis (ICAE), Universidad Complutense de Madrid, Spain)

Abstract

Government interventions to support the financial institutions fall into two broad categories: direct interventions (which immediately increase the government's financing need) and off-balance sheet contingent guarantees (which have no immediate impact on debt but will add to government debt as and when a loss materializes). If financial sector losses are independent of sovereign's own risk, all else being equal, they must have the same effect on the sovereign's risk profile, even though they impact the government balance sheet differently. In this paper, we study the nature and effectiveness of a government's interventions on its own risk profile. Our findings suggest that direct assistance has a significantly large effect on sovereign risk, while the effect of contingent guarantees is statistically not significant, being significant only for the euro area founders. Controlling for government interventions, we also find that GDP, perceived government effectiveness, economic sentiment, size of the financial sector, and membership of the euro area reduce the sovereign risk, while asset concentration within financial sector, unemployment and ination have an adverse effect. Our findings support Bresciani and Cossaro (2016)'s claim that during the sovereign debt crisis, governments undertook complex financial operations to change the composition of their interventions towards contingent guarantees.

Suggested Citation

  • Manish K. Singh & Marta Gómez-Puig & Simón Sosvilla-Rivero, 2019. "“Increasing contingent guarantees: The asymmetrical effect on sovereign risk of different government interventions"," IREA Working Papers 201914, University of Barcelona, Research Institute of Applied Economics, revised Sep 2019.
  • Handle: RePEc:ira:wpaper:201914
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    File URL: http://www.ub.edu/irea/working_papers/2019/201914.pdf
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    References listed on IDEAS

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    1. König, Philipp & Anand, Kartik & Heinemann, Frank, 2014. "Guarantees, transparency and the interdependency between sovereign and bank default risk," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 321-337.
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    More about this item

    Keywords

    Sovereign risk; Financial assistance; Fiscal capacity; Bailout; Contingent guarantee JEL classification:G01; H63;

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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