Determinants of Government Bond Spreads in New EU Countries

42 Pages Posted: 26 Sep 2009

See all articles by Ioana Alexopoulou

Ioana Alexopoulou

European Central Bank (ECB)

Irina Bunda

IMF-Singapore Regional Training Institute

Annalisa Ferrando

European Central Bank (ECB)

Date Written: September 23, 2009

Abstract

Based on a rich database of government bond spreads and macroeconomic indicators over the period 2001-2008, we propose an empirical assessment of the role of fundamentals in driving long-term sovereign bond spreads of the new EU countries (Bulgaria, Czech Republic, Latvia, Lithuania, Hungary, Poland, Romania and Slovakia). The results of a dynamic panel error correction model that accounts for both common long-run determinants and cross-country heterogeneities in sovereign bond spreads tend to suggest that fundamentals still matter for market’s assessment of a country creditworthiness. Countries' levels of external debt, fiscal and current account balances, exchange and inflation rates, their degree of trade openness as well as short-term interest rate spreads play an important role in the new EU countries' access to long-term finance. We furthermore challenge the pooled mean approach in order to check whether other factors may become relevant in the long-run for two sub-groups of countries according to the developments in their current account balances. Fiscal fundamentals seem to matter most for one group of countries, those characterised by widening external imbalances and historically high levels of spreads. In a context of heightened risk aversion and potential for spill over effects, this group of countries are more exposed to domestic sources of vulnerability as well as to swings in market perceptions of sovereign risks.

Keywords: long-term government bond spreads, new EU countries, pooled mean group estimation

JEL Classification: G12, H60, E62

Suggested Citation

Alexopoulou, Ioana and Bunda, Irina and Ferrando, Annalisa, Determinants of Government Bond Spreads in New EU Countries (September 23, 2009). ECB Working Paper No. 1093, Available at SSRN: https://ssrn.com/abstract=1474275 or http://dx.doi.org/10.2139/ssrn.1474275

Ioana Alexopoulou

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Irina Bunda

IMF-Singapore Regional Training Institute ( email )

10 Shenton Way
MAS Building #14-03
Singapore, Singapore 079117
Singapore

Annalisa Ferrando (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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