The Announcement Effect of the EFSF

Abstract

This paper documents the market reaction to the introduction of the European Financial Stability Facility (EFSF) in 2010 and 2011. The effect on borrowing rates is ambiguous - Greece, Ireland, Portugal, Spain, Italy and Slovenia exhibit a decrease in rates on event days, the remaining Eurozone countries exhibit an increase. The sovereign CDS market shows that not all of the effect on rates can be attributed to the assumption of default risk. CDS spreads do not increase in the case of Germany, France, the Netherlands, and Finland, consistent with a moderate increase in riskless rates. However, the net effect on the value of all Eurozone debt is positive and amounts to EUR 108 billion. Market participants also seem to anticipate an impact on real economic conditions given that the increase in non-financial equity value is EUR 126 billion, or 1.4% of Eurozone GDP.

Keywords: sovereign debt, intervention, EMU, debt crisis, loan guarantee, event study

JEL Classification: G15, F34, H63, H81