The Geography of the Great Rebalancing in Euro Area Bond Markets During the Sovereign Debt Crisis

27 Pages Posted: 26 Aug 2015

See all articles by Roland Beck

Roland Beck

European Central Bank (ECB)

Georgios Georgiadis

European Central Bank (ECB)

Johannes Gräb

European Central Bank (ECB)

Date Written: August 25, 2015

Abstract

During the sovereign debt crisis investors rebalanced out of stressed and into non-stressed euro area countries, thereby contributing to the tensions in euro area financial markets. This paper examines the geographical pattern of this great rebalancing. Specifically, we test whether euro area and non-euro area investors adjusted their holdings of debt securities of euro area stressed and non-stressed countries dis-proportionately relative to benchmarks derived from a standard gravity model for portfolio choice. We find that non-euro area investors under-invested in stressed euro area countries, but did not over-invest in non-stressed euro area countries. As regards intra-euro area flows, we do not find evidence for a disproportionate slowdown of capital flows from non-stressed into stressed euro area countries. Instead, our results suggest that investors in stressed euro area countries disproportionately shifted capital into debt securities of non-stressed euro area countries. Finally, we find that both non-euro area investors' under-investment in stressed countries and stressed euro area investors' over-investment in non-stressed euro area countries ceased after the announcement of the ECB's OMT programme.

Keywords: Foreign investment, international capital flows, euro area sovereign debt crisis, gravity model

JEL Classification: F34, F36, G15

Suggested Citation

Beck, Roland and Georgiadis, Georgios and Grab, Johannes, The Geography of the Great Rebalancing in Euro Area Bond Markets During the Sovereign Debt Crisis (August 25, 2015). ECB Working Paper No. 1839, Available at SSRN: https://ssrn.com/abstract=2650427

Roland Beck (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Georgios Georgiadis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Johannes Grab

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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