On Creditor Seniority and Sovereign Bond Prices in Europe

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

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

Sven Steinkamp

Universität Osnabrück - Institute of Empirical Economic Research ( email )

Barbarastr. 12
Osnabrueck, 49076
Germany

Frank Westermann (Contact Author)

University of Osnabrueck - Department of Economics ( email )

Rolandstr. 8
Osnabrueck, D-49069
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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