On Creditor Seniority and Sovereign Bond Prices in Europe
25 Pages Posted: 3 Oct 2012
Date Written: September 28, 2012
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