A Note on the Credit Risk Component of Yields on Irish Sovereign Bonds Issued in Foreign Currencies

Abstract

In this note we provide new evidence regarding the size and dynamics of the credit risk premium on Irish Sovereign bonds during the 1980s and early 1990s when fiscal conditions were similar to those currently being experienced. Our analysis is not confounded by the effects of exchange rate risk since it is based on yield spreads of foreign issues of Irish bonds. We find that there was a surprisingly small but significant risk premium related to expected future fiscal instability. We discuss why recent sovereign credit risk conditions seem to be in such stark contrast with the past experience.

Keywords: credit risk, bond yield spread, Irish sovereign yield, fiscal instability

JEL Classification: G10, E3, E43, E63, E65, E66