Abstract
We find strong evidence of country interdependence in the pricing of default risk, which suggests that a crisis can easily propagate from countries with weak fiscal fundamentals to other fiscally sounder member States. Interest rate interdependence differs between countries with high interest rates – high yielders – and countries with low interest rates – low yielders –. The former countries are linked through global spreads; i. e. they are exposed to the interest rate spreads (over Germany) of other troubled countries to a degree which increases with fiscal proximity. Low yielders with sounder fiscal fundamentals are partially immune from the high interest rates of fiscally weak member States but are still exposed to the risk of a euro break-up that is priced in Quanto CDS. This “euro risk” factor is a main driver of the interest rate spreads of low yielders until August 2012. More importantly, our case study of Italy shows that the impact of the global spread variable is dominated by changes in market sentiment, a sign that the Italian 2011–2012 crisis had the characteristics of a debt run more than a crisis of fundamentals. This evidence suggests that Eurobonds would be justified as an instrument for crisis prevention in the absence of a “lender of last resort”. With the announcement of OMTs, the ECB seems to have taken such role upon itself, mainly as a response to the risk of a euro break-up. We show that OMTs led to a significant fall in the impact effect of the global spread variable in the Italian case. The ECB’s ability to buy member States’ bonds reduces the risk of a self-fulfilling debt run but also deprives Eurobonds of their role in crisis prevention. Proposals to introduce Eurobonds to finance investment projects and expenditures related to the security and refugee crisis appear more realistic.
Acknowledgements
We thank participants at the Workshop on the Law and Economics of “Eurobonds Beyond Crisis Management” (Hamburg, 8–9 January 2016) for useful comments and suggestions. Helpful comments from two anonymous referees are gratefully acknowledged.
Appendix
Yield spreads on bunds, seemingly unrelated regression – subsample evidence, daily data. High Yielders: Spain, Greece, Ireland, Italy, Portugal.
| ESP | GRE | IRL | ITA | POR | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Sample | 2009:11 | 2009:11 | 2012:08 | 2009:11 | 2009:11 | 2009:11 | 2009:11 | 2009:11 | 2012:08 | 2009:11 | 2009:11 | 2012:08 | 2009:11 | 2009:11 | 2012:08 |
| 2015:11 | 2012:07 | 2015:11 | 2015:11 | 2012:07 | 2015:11 | 2015:11 | 2012:07 | 2015:11 | 2015:11 | 2012:07 | 2015:11 | 2015:11 | 2012:07 | 2015:11 | |
| Constant | 3.1E05 | –3E05 | 4.E04 | 0.0005 | 0.0002 | 4.E05 | 0.0004 | 0.002 | –6.E04 | 2.E4 | 0.0008 | 0.0012 | 2.E4 | 0.003 | 4.E05 |
| (1E04) | (0.0004) | (3.E04) | (0.0019) | (0.001) | (0.001) | (0.0002) | (0.0008) | (2:E04) | (2.E4) | (0.0007) | (0.0008) | (2.E4) | (0.001) | (0.001) | |
| 0.980 | 0.970 | 0.960 | 0.994 | 0.971 | 0.977 | 0.998 | 0.993 | 0.965 | 0.988 | 0.984 | 0.922 | 0.998 | 0.993 | 0.977 | |
| (0.004) | (0.007) | (0.008) | (0.003) | (0.016) | (0.007) | (0.002) | (0.005) | (0.007) | (0.004) | (0.007) | (0.010) | (0.003) | (0.006) | (0.007) | |
| –2.E06 | 0.0023 | –1E04 | –4.E04 | –0.003 | –0.005 | –7.E04 | 0.0005 | 0.001 | –4.E04 | –0.002 | –0.002 | –4.E04 | 0.003 | –7.E04 | |
| (0.0002) | (0.0013) | (1:E03) | (0.001) | (0.0023) | (0.0053) | (2.E04) | (0.0008) | (0.0005) | (4.E04) | (0.002) | (0.0013) | (2.E04) | (0.0025) | (0.0001) | |
| 0.0004 | –0.006 | 0.008 | 0.002 | –0.024 | –0.017 | 0.002 | 0.019 | 0.006 | –0.002 | 0.006 | –0.007 | 0.006 | 0.009 | –0.011 | |
| (0.002) | (0.007) | (0.003) | (0.009) | (0.016) | (0.021) | (0.002) | (0.009) | (0.004) | (0.003) | (0.008) | (0.005) | (0.007) | (0.003) | (0.007) | |
| 1.207 | 0.856 | 1.86 | 5.527 | 5.997 | –1.314 | 0.762 | 0.507 | 1.500 | 0.711 | 0.261 | 2.215 | 0.614 | –0.01 | 2.450 | |
| (0.136) | (0.195) | (0.200) | (0.914) | (1.12) | (1.59) | (0.198) | (0.318) | (0.180) | (0.147) | (0.210) | (0.22) | (0.293) | (0.447) | (0.36) | |
| –1.114 | –0.831 | –1.71 | –5.492 | –5.017 | 0.136 | –0.756 | –0.592 | –1.221 | –0.701 | –0.322 | –1.838 | –0.742 | –0.327 | –2.284 | |
| (0.135) | (0.192) | (0.19) | (0.910) | (1.12) | (1.58) | (0.198) | (0.318) | (0.18) | (0.146) | (0.208) | (0.22) | (0.293) | (0.447) | (0.36) | |
| 0.844 | 0.714 | 1.428 | 0.938 | 0.599 | 3.737 | 0.109 | 0.114 | 0.103 | 0.358 | 0.391 | 0.331 | 0.925 | 0.982 | 0.763 | |
| (0.030) | (0.042) | (0.044) | (0.094) | (0.103) | (0.237) | (0.012) | (0.019) | (0.012) | (0.021) | (0.033) | (0.024) | (0.005) | (0.079) | (0.055) | |
| –0.839 | –0.685 | –1.387 | –0.922 | –0.577 | –3.632 | –0.110 | –0.112 | –0.100 | –0.350 | –0.366 | –0.325 | –0.890 | –0.912 | –0.757 | |
| (0.030) | (0.043) | (0.045) | (0.095) | (0.103) | (0.239) | (0.012) | (0.019) | (0.012) | (0.021) | (0.034) | (0.024) | (0.005) | (0.079) | (0.056) | |
| Adj R-squared | 0.99 | 0.99 | 0.99 | 0.95 | 0.99 | 0.99 | 0.99 | 0.99 | 0.99 | 0.99 | 0.99 | 0.99 | 0.99 | 0.99 | 0.99 |
| Mean Dep. Variable | 0.022 | 0.025 | 0.022 | 0.096 | 0.108 | 0.086 | 0.030 | 0.048 | 0.0158 | 0.022 | 0.023 | 0.021 | 0.046 | 0.059 | 0.035 |
| SE of Regression | 0.0008 | 0.0009 | 0.0005 | 0.004 | 0.004 | 0.003 | 0.001 | 0.0015 | 0.0004 | 0.0008 | 0.001 | 0.0006 | 0.002 | 0.002 | 0.0001 |
| BEL | FIN | FRA | NL | OE | |||||||||||
| Sample | 2009:11 2015:11 | 2009:11 2012:07 | 2012:08 2015:11 | 2009:11 2015:11 | 2009:11 2012:07 | 2012:08 2015:11 | 2009:11 2015:11 | 2009:11 2012:07 | 2012:08 2015:11 | 2009:11 2015:11 | 2009:11 2012:07 | 2012:08 2015:11 | 2009:11 2015:11 | 2009:11 2012:07 | 2012:08 2015:11 |
| Constant | 1.8E04 | 6.6E04 | 1.3E05 | 5.4E05 | –2.E04 | 4.2E05 | 2.E06 | –1.E04 | 1.E04 | 3.E05 | –2.E05 | 6.E05 | 2.E05 | –7.E05 | 2.E04 |
| (7.5E05) | (1.9E04) | (8.8E04) | (2.2E05) | (1.E04) | (2.8E05) | (5.E05) | (1.E04) | (1.E04) | (2.E05) | (4.E05) | (4.E05) | (2.E05) | (4.E05) | (8.E05) | |
| 0.980 | 0.970 | 0.970 | 0.953 | 0.936 | 0.952 | 0.980 | 0.975 | 0.969 | 0.960 | 0.940 | 0.966 | 0.984 | 0.981 | 0.942 | |
| (0.004) | (0.007) | (0.006) | (0.004) | (0.011) | (0.009) | (0.004) | (0.007) | (0.006) | (0.006) | (0.01) | (0.007) | (0.004) | (0.007) | (0.008) | |
| –5.E04 | –0.003 | 0.0003 | –2.E05 | –0.001 | –2.E04 | 8.E05 | –8.E04 | –4.E05 | –2.E04 | –9.E04 | –5.E05 | –2.E05 | –0.002 | 1.E06 | |
| (0.001) | (0.0008) | (0.0002) | (1.E04) | (0.0004) | (0.0003) | (0.0002) | (0.064) | (0.0003) | (0.0001) | (0.0003) | (0.0003) | (0.004) | (0.0008) | (0.0003) | |
| –5.E05 | –0.002 | 0.004 | –4E04 | 2.E04 | –2.E04 | 8.E05 | –6.E03 | 0.001 | –9.E04 | –2.E03 | 0.001 | 1.E04 | –0.009 | 0.008 | |
| (0.001) | (0.004) | (0.003) | (0.0006) | (2.E03) | (7.E04) | (0.02) | (0.004) | (0.001) | (0.0008) | (0.002) | (0.001) | (0.006) | (0.003) | (0.004) | |
| 0.266 | 0.281 | 0.142 | 0.089 | 0.115 | –0.207 | 0.232 | 0.238 | 0.026 | 0.109 | 0.119 | –0.047 | 0.183 | 0.217 | 0.200 | |
| (0.008) | (0.13) | (0.084) | (0.033) | (0.04) | (0.062) | (0.005) | (0.08) | (0.073) | (0.003) | (0.04) | (0.068) | (0.005) | (0.08) | (0.02) | |
| –0.286 | –0.323 | –0.037 | –0.094 | –0.132 | 0.171 | –0.213 | –0.216 | –0.006 | –0.094 | –0.112 | 0.062 | –0.185 | –0.227 | –0.204 | |
| (0.08) | (0.12) | (0.084) | (0.033) | (0.04) | (0.062) | (0.005) | (0.08) | (0.072) | (0.003) | (0.04) | (0.066) | (0.005) | (0.08) | (0.02) | |
| 0.228 | 0.211 | 0.285 | 0.095 | 0.078 | 0.347 | 0.111 | 0.097 | 0.248 | 0.100 | 0.088 | 0.187 | 0.211 | 0.200 | 0.281 | |
| (0.013) | (0.02) | (0.016) | (0.008) | (0.01) | (0.023) | (0.008) | (0.01) | (0.014) | (0.008) | (0.01) | (0.016) | (0.012) | (0.017) | (0.02) | |
| –0.220 | –0.199 | –0.293 | –0.087 | –0.064 | –0.324 | –0.109 | –0.096 | –0.245 | –0.099 | –0.086 | –0.188 | –0.206 | –0.204 | –0.271 | |
| (0.013) | (0.02) | (0.016) | (0.009) | (0.01) | (0.024) | (0.008) | (0.01) | (0.014) | (0.008) | (0.01) | (0.016) | (0.012) | (0.017) | (0.02) | |
| Adj R-squared | 0.99 | 0.99 | 0.99 | 0.98 | 0.97 | 0.95 | 0.98 | 0.99 | 0.98 | 0.97 | 0.97 | 0.97 | 0.99 | 0.99 | 0.97 |
| Mean Dep. Variable | 0.0087 | 0.012 | 0.006 | 0.0025 | 0.0032 | 0.0019 | 0.0054 | 0.0062 | 0.0047 | 0.0027 | 0.0031 | 0.0025 | 0.0043 | 0.0060 | 0.0030 |
| SE of Regression | 0.0004 | 0.0006 | 0.0002 | 0.00025 | 0.0002 | 0.0005 | 0.0003 | 0.0002 | 0.0002 | 0.0002 | 0.0002 | 0.0002 | 0.0002 | 0.0004 | 0.0002 |
Note: Coefficients significant at the 5 percent level using the standard t-distribution are reported in bold.
References
Attinasi, M.G., C. Checherita, and C. Nickel. 2010. “What Explains the Surge in Euro Area Sovereign Spreads During the Financial Crisis 2007–2009?,” 10 Public Finance and Management 595–645.10.1002/9781118267073.ch46Search in Google Scholar
Bali, T.G., and R.F. Engle. 2010. “Resurrecting the Conditional CAPM with Dynamic Conditional Correlations,” SSRN Working Paper, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1298633.10.2139/ssrn.1364865Search in Google Scholar
Bernoth, K., J. von Hagen, and L. Schuknecht. 2012. “Sovereign Risk Premiums in the Euro Government Bond Market,” 31 Journal of International Money and Finance 975–995.10.1016/j.jimonfin.2011.12.006Search in Google Scholar
Calvori, F., M. Dentella, and G.P. Gallo. 2016. “Sovereign Debt Spreads in the Euro Area: When Fears Become Excess Fears,” Working Paper No 3/2016, DISIA Università di Firenze. http://local.disia.unifi.it/wp_disia/2016/wp_disia_2016_03.pdf.Search in Google Scholar
Dees, S., F. Di Mauro, M.H. Pesaran, and L.V. Smith. 2007. “Exploring the International Linkages of the Euro Area: A Global VAR Analysis,” 22 Journal of Applied Econometrics 1–38.10.1002/jae.932Search in Google Scholar
De Grauwe, P. 2011. “Managing a Fragile Eurozone,” 12 CESifo Forum 40–45.Search in Google Scholar
De Grauwe, P. 2013. “The European Central Bank as Lender of Last Resort in the Government Bond Markets,” 59 CESifo Economic Studies 520–535.10.1093/cesifo/ift012Search in Google Scholar
De Santis, R.A. 2015. “A Measure of Redenomination Risk,” Working Paper Series No. 1785, European Central Bank. https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1785.en.pdf.10.2139/ssrn.2620732Search in Google Scholar
Di Cesare, A., G. Grande, M. Manna, and M. Taboga. 2012. “Recent Estimates of Sovereign Risk Premia for Euro-Area Countries,” Occasional Papers No. 128, Bank of Italy. https://www.bancaditalia.it/pubblicazioni/qef/2012-0128/QEF_128.pdf.10.2139/ssrn.2159218Search in Google Scholar
ECB. 2012. “Technical Features of Outright Monetary Transactions,” Press Release, September 6, http://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html.Search in Google Scholar
Engle, R.F., and K.F. Kroner. 1995. “Multivariate Simultaneous Generalized ARCH,” 11 Econometric Theory 122–150.10.1017/S0266466600009063Search in Google Scholar
Favero, C.A. 2013. “Modelling and Forecasting Government Bond Spreads in the Euro Area: A GVAR Model,” 177 Journal of Econometrics 343–356.10.1016/j.jeconom.2013.04.004Search in Google Scholar
Favero, C.A., and A. Missale. 2010. “EU Public Debt Management and Eurobonds,” in European Parliament’s Committee on Economic and Monetary Affairs, ed. Euro Area Governance – Ideas for Crisis Management Reforms. Brussels: European Parliament.Search in Google Scholar
Favero, C.A., and A. Missale. 2012. “Sovereign Spreads in the Euro Area. Which Prospects for a Eurobond?,” 27 Economic Policy 231–273.10.1111/j.1468-0327.2012.00282.xSearch in Google Scholar
Giovannini Group Report. 2000. “Co-ordinated Public Debt Issuance in the Euro Area.” November. http://ec.europa.eu/economy_finance/publications/publication6372_en.pdf.Search in Google Scholar
Monti, M. 2010. “A New Strategy for the Single Market. At the Service of Europe’s Economy and Society,” Report to the President of the European Commission. http://ec.europa.eu/bepa/pdf/monti_report_final_10_05_2010_en.pdf.Search in Google Scholar
Pesaran, M.H., T. Schuermann, and S.M. Weiner. 2004. “Modelling Regional Interdependencies Using a Global Error-Correcting Macro-Econometric Model,” 22(2) Journal of Business and Economic Statistics 129–162.10.1198/073500104000000019Search in Google Scholar
Vanden Bosch, X. 2012. “Preventing the Rise of Sovereign Borrowing Costs in the Eurozone: What Can the ESM and the ECB Achieve?” Egmont Paper No. 56, Royal Institute for International Relations. http://aei.pitt.edu/39375.Search in Google Scholar
©2016 by De Gruyter
