Sovereign Reputation and Yield Spreads: A Case Study on Retroactive Legislation

35 Pages Posted: 18 Oct 2016

See all articles by Otto Randl

Otto Randl

WU Vienna University of Economics and Business

Josef Zechner

Vienna University of Economics and Business

Date Written: June 7, 2016

Abstract

This paper uses recent legislation in Austria to establish a link between sovereign reputation and yield spreads. In 2009, Hypo Alpe Adria International, a bank previously co-owned by the regional government of Carinthia, had been nationalized by Austria’s central government in order to avoid a default triggering multi-billion Euro local government guarantees. In 2015, special legislation retroactively introduced collective action clauses allowing a haircut on both the bonds and the guarantees while avoiding formal default. We document that legislative and administrative action designed to partly abrogate the guarantees resulted in a loss of reputation, leading to higher yield spreads for sovereign debt. Our analysis of covered bonds uncovers an increase in yield spreads on the secondary market and a deterioration of primary market conditions.

Suggested Citation

Randl, Otto and Zechner, Josef, Sovereign Reputation and Yield Spreads: A Case Study on Retroactive Legislation (June 7, 2016). CFS Working Paper, No. 545. Available at SSRN: https://ssrn.com/abstract=2853354 or http://dx.doi.org/10.2139/ssrn.2853354

Otto Randl

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, 1020
Austria
+ 43 1 313 36 - 5076 (Phone)

Josef Zechner (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

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