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

IEB Working Paper N. 2013/028

37 Pages Posted: 16 Oct 2013

See all articles by Lars P. Feld

Lars P. Feld

Walter Eucken Institute

Alexander Kalb

Bayern LB

Marc-Daniel Moessinger

Centre for European Economic Research (ZEW)

Steffen Osterloh

German Council of Economic Experts

Date Written: June 13, 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 analyze 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: E62, G12, H63, H74

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 (June 13, 2013). IEB Working Paper N. 2013/028, Available at SSRN: https://ssrn.com/abstract=2340513 or http://dx.doi.org/10.2139/ssrn.2340513

Lars P. Feld

Walter Eucken Institute ( email )

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

Alexander Kalb

Bayern LB ( email )

Brienner Straße 18
München, 80333
Germany

Marc-Daniel Moessinger (Contact Author)

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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