Hypnosis Before Wake-Up Call?! The Revival of Sovereign Credit Risk Perception in the EMU-Crisis

34 Pages Posted: 17 Sep 2014

See all articles by Ingo G. Bordon

Ingo G. Bordon

University of Duisburg-Essen

Kai Schmid

Macroeconomic Policy Institute (IMK), Hans Böckler Foundation

Michael Schmidt

Goethe University Frankfurt - Graduate School of Economics, Finance and Management (GSEFM)

Date Written: August 21, 2014

Abstract

This paper qualifies the view of pronounced overpricing of sovereign bonds for the so-called GIIPS countries during the financial crisis. We use annual data for 21 OECD countries from 1980 to 2012. As opposed to related studies, our data set allows us to contrast the pricing of macroeconomic fundamentals between three distinct phases: The period before the signing of the Maastricht treaty, the EMU convergence era, and the financial crisis. In detail, we find: (i) Since the 1980s the role of public debt for the pricing of government bonds has changed twice: Firstly following the signing of the Maastricht treaty, and again with the wake-up call due to the onset of the financial crisis. (ii) Before the financial crisis EMU member countries had -- de facto -- been perceived as a homogenous group with regard to the role of public debt for sovereign risk pricing. (iii) With the reconsideration of country-specific fundamentals the role of public debt has not only been revived but its impact upon bond yield spreads has become comparable to the time before the Maastricht treaty.

Keywords: EMU, GIIPS, public debt, risk perception, sovereign bond yields

JEL Classification: E43, E44, E62

Suggested Citation

Bordon, Ingo G. and Schmid, Kai and Schmidt, Michael, Hypnosis Before Wake-Up Call?! The Revival of Sovereign Credit Risk Perception in the EMU-Crisis (August 21, 2014). CESifo Working Paper Series No. 4946. Available at SSRN: https://ssrn.com/abstract=2496908

Ingo G. Bordon

University of Duisburg-Essen ( email )

Lotharstrasse 1
Duisburg, 47048
Germany

HOME PAGE: http://www.makro.wiwi.uni-due.de/

Kai Schmid (Contact Author)

Macroeconomic Policy Institute (IMK), Hans Böckler Foundation ( email )

Düsseldorf
Germany

Michael Schmidt

Goethe University Frankfurt - Graduate School of Economics, Finance and Management (GSEFM) ( email )

House of Finance
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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