Sovereign Bond Market Reactions to Fiscal Rules and No-Bailout Clauses - The Swiss Experience

31 Pages Posted: 24 Apr 2013

See all articles by Lars P. Feld

Lars P. Feld

Walter Eucken Institute; University of Freiburg - College of Economics and Behavioral Sciences; CESifo (Center for Economic Studies and Ifo Institute)

Alexander Kalb

ZEW – Leibniz Centre for European Economic Research

Marc-Daniel Moessinger

Centre for European Economic Research (ZEW)

Steffen Osterloh

German Council of Economic Experts

Date Written: April 23, 2013

Abstract

We investigate the political determinants of risk premiums which sub-national governments in Switzerland have to pay for their sovereign bond emissions. For this purpose we analyse financial market data from 288 tradable cantonal bonds in the period from 1981 to 2007. Our main focus is on two different institutional factors. First, many of the Swiss cantons have adopted strong fiscal rules. We find evidence that both the presence and the strength of these fiscal rules contribute significantly to lower cantonal bond spreads. Second, we study the impact of a credible no-bailout regime on the risk premia of potential guarantors. We make use of the Leukerbad court decision in July 2003 which relieved the cantons from backing municipalities in financial distress, thus leading to a fully credible no-bailout regime. Our results show that this break lead to a reduction of cantonal risk premia by about 25 basis points. Moreover, it cut the link between cantonal risk premia and the financial situation of the municipalities in its canton which existed before. This demonstrates that a not fully credible no-bailout commitment can entail high costs for the potential guarantor.

Keywords: sub-national government bonds, fiscal rules, no-bailout clause, sovereign risk premium

JEL Classification: E620, G120, H630, H740

Suggested Citation

Feld, Lars P. and Kalb, Alexander and Moessinger, Marc-Daniel and Osterloh, Steffen, Sovereign Bond Market Reactions to Fiscal Rules and No-Bailout Clauses - The Swiss Experience (April 23, 2013). CESifo Working Paper Series No. 4195, Available at SSRN: https://ssrn.com/abstract=2255402 or http://dx.doi.org/10.2139/ssrn.2255402

Lars P. Feld (Contact Author)

Walter Eucken Institute ( email )

Goethestrasse 10
Freiburg im Breisgau, Baden-Württemberg D-79100
Germany

University of Freiburg - College of Economics and Behavioral Sciences ( email )

Freiburg, D-79085
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Alexander Kalb

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Marc-Daniel Moessinger

Centre for European Economic Research (ZEW) ( email )

L7,1
Mannheim, DE 68161
Germany
+49 621 1235 161 (Phone)
+49 621 1235 223 (Fax)

HOME PAGE: http://www.zew.de/en/mitarbeiter/mitarbeiter.php3?action=mita&kurz=mdm

Steffen Osterloh

German Council of Economic Experts ( email )

Federal Statistical Office
Gustav-Stresemann-Ring 11
Wiesbaden, Hessen 65180
Germany

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