Increasing Contingent Guarantees: The Asymmetrical Effect on Sovereign Risk of Different Government Interventions

Research Institute of Applied Economics Working Paper 2019/14

41 Pages Posted: 25 Sep 2019

See all articles by Manish Singh

Manish Singh

University of Barcelona; Indira Gandhi Institute of Development Research (IGIDR)

Marta Gómez-Puig

Economic Theory Department. University of Barcelona

Simon Sosvilla-Rivero

UCM Institute for Economic Analysis

Date Written: September 17, 2019

Abstract

Government interventions to support the financial institutions fall into two broad categories: direct interventions (which immediately increase the government’s financing needs) and off-balance-sheet contingent guarantees (which have no immediate impact on debt but will add to government debt as and when a loss materializes). If financial sector losses are independent of sovereign’s own risk, all else being equal, they must have the same effect on the sovereign’s risk profile, even though they impact the government balance sheet differently. In this paper, we study the nature and effectiveness of a government’s interventions on its own risk profile. Our findings suggest that direct assistance has a significantly large effect on sovereign risk, while the effect of contingent guarantees is statistically not significant, being significant only for the euro area founders. Controlling for government interventions, we also find that GDP, perceived government effectiveness, economic sentiment, size of the financial sector, and membership of the euro area reduce the sovereign risk, while asset concentration within the financial sector, unemployment and inflation have an adverse effect. Our findings support Bresciani and Cossaro (2016)’s claim that during the sovereign debt crisis, governments undertook complex financial operations to change the composition of their interventions towards contingent guarantees.

Keywords: sovereign risk, financial assistance, fiscal capacity, bailout, contingent guarantee

JEL Classification: G01, H63

Suggested Citation

Singh, Manish and Gómez-Puig, Marta and Sosvilla-Rivero, Simon, Increasing Contingent Guarantees: The Asymmetrical Effect on Sovereign Risk of Different Government Interventions (September 17, 2019). Research Institute of Applied Economics Working Paper 2019/14. Available at SSRN: https://ssrn.com/abstract=3455116 or http://dx.doi.org/10.2139/ssrn.3455116

Manish Singh

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Mumbai, Maharashtra 400065
India

Marta Gómez-Puig

Economic Theory Department. University of Barcelona ( email )

Diagonal 690
Barcelona, 08034
Spain
34-93-4020113 (Phone)
34-93-4039082 (Fax)

Simon Sosvilla-Rivero (Contact Author)

UCM Institute for Economic Analysis ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

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