On Creditor Seniority and Sovereign Bond Prices in Europe

Steinkamp, Sven; Westermann, Frank

doi:10.2139/ssrn.2155605

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On Creditor Seniority and Sovereign Bond Prices in Europe

CESifo Working Paper Series No. 3944

25 Pages Posted: 3 Oct 2012

See all articles by Sven Steinkamp

Sven Steinkamp

Universität Osnabrück - Institute of Empirical Economic Research

Frank Westermann

University of Osnabrueck - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: September 28, 2012

Abstract

The recent increase of interest rate spreads in Europe and their apparent detachment from underlying fundamental variables has generated a debate on multiple equilibria in the sovereign bond market (see De Grauwe and Ji (2012)). We critically evaluate this hypothesis, by pointing towards an alternative explanation: the increasing share of senior lenders (IMF, ECB, EFSF, etc.) in the total outstanding government debt of countries in crisis. We illustrate the close relationship between senior tranche lending – including Target2 balances – and recent developments in the sovereign bond market, both graphically and in a formal regression analysis.

Keywords: government bond spreads, Eurozone, senior tranche lending, multiple equilibria, sovereign debt crisis, Target2

JEL Classification: F340, G120, H810

Suggested Citation: Suggested Citation

Steinkamp, Sven and Westermann, Frank, On Creditor Seniority and Sovereign Bond Prices in Europe (September 28, 2012). CESifo Working Paper Series No. 3944, Available at SSRN: https://ssrn.com/abstract=2155605 or http://dx.doi.org/10.2139/ssrn.2155605