Determinants of government bond spreads in new EU countries

Based on a rich database of government bond spreads and macroeconomic indicators over the period 2001-2008, we propose an empirical assessment of the role of fundamentals in driving long-term sovereign bond spreads of the new EU countries (Bulgaria, Czech Republic, Latvia, Lithuania, Hungary, Poland, Romania and Slovakia). The results of a dynamic panel error correction model that accounts for both common long-run determinants and cross-country heterogeneities in sovereign bond spreads tend to suggest that fundamentals still matter for market’s assessment of a country creditworthiness. Countries’ levels of external debt, fiscal and current account balances, exchange and inflation rates, their degree of trade openness as well as short-term interest rate spreads play an important role in the new EU countries’ access to long-term finance. We furthermore challenge the pooled mean approach in order to check whether other factors may become relevant in the long-run for two sub-groups of countries according to the developments in their current account balances. Fiscal fundamentals seem to matter most for one group of countries, those characterised by widening external imbalances and historically high levels of spreads. In a context of heightened risk aversion and potential for spill over effects, this group of countries are more exposed to domestic sources of vulnerability as well as to swings in market perceptions of sovereign risks. JEL Classification: G12, H60, E62long-term government bond spreads, new EU countries, pooled mean group estimation

Determinants of sovereign risk premia for European emerging markets

This paper analyses the determinants of the changes in sovereign bond spreads in emerging European markets before and during the recent global financial crisis. In particular, these determinants are associated with changes in market sentiment and in domestic macroeconomic fundamentals. The model was estimated on panel ata for eight central and eastern European countries between Q1:2000 and Q2:2010, using least squares and controlling for serial correlation. The results show that the dynamics of spreads can be explained by both market sentiment indicators and macroeconomic fundamentals. In particular, the external imbalances did not exert any discernible effect on spreads prior to the crisis, but became increasingly significant as the crisis broke out.sovereign bond spreads, emerging markets, central and eastern Europe, global financial crisis, market sentiment, macroeconomic fundamentals

An empirical assessment of the key drivers of sovereign bond yields in South Africa: it’s not just about fundamentals

Thesis (M.Com. (Business Finance))--University of the Witwatersrand, Faculty of Commerce, Law and Management, School of Economic and Business Sciences, 2017The writer studies the short-run determinants of bond yield volatility in South Africa (SA) by analyzing the impact that global factors –representing global funding conditions – have on the changes to the rand denominated generic 10-year government bond yield (SAGB). This is followed by a one-period forward forecast of this volatility. The explanatory variables tested in this study are as follows: net bond purchases by foreign investors, Chicago Board Options Volatility Index (VIX), JP Morgan Emerging Market Bond Index (JP EMBI) spread, the US dollar to SA rand (USDZAR) exchange rate, the SA 5 year credit default swap (CDS) rate, the 12 month interest rate expectation/9x12 forward rate agreement (FRA), dollar spot price of gold and dollar spot price of oil. The study period ranges from January 2000 to December 2015. The GARCH modelling technique is used due to its ability to capture the volatility clustering effects observed in time series return data. The writer used the Gaussian distribution as the default model, however in order to control for the skewness and fat-tails in financial market return data, the Student-T and Generalised Error distributions are also tested to see if the non-normally distributed bond returns could be better captured by alternative parametric assumptions. The results show that all the explanatory variables, with the exception of the FRA, are statistically significant in explaining volatility in the local generic 10-year government bond.GR201

Manias, panics and crashes in emerging markets: an empirical investigation of the post-2008 crisis period

Because of their economic importance, international bond markets are thought to be the likely location for the operation of financial market pressures on emerging market (EM) government policy. An important but unresolved debate that runs through the literature is the relative importance of domestic factors specific to the country receiving the capital flows (pull factors), versus push factors exogenous to the receiving country, in driving portfolio flows to EMs. Through extensive interviews with financial market participants, and analysis of the financial press between January 2008 and 2013, this paper argues that not only were market participants fully aware of the importance of push factors over the cycle, but that their perceptions of the domestic fundamentals themselves were influenced by these push factors. The paper provides evidence on the micro-foundations of investment decision making that make investors susceptible to influence by the push factors, and adds to a growing body of evidence that financial market borrowing costs are even less in the control of emerging market governments than previously assumed, because even when investors pay attention to domestic fundamentals, their assessments can be divorced from reality. This means that government efforts to attract foreign capital through implementing investors' preferred policies may be ultimately futile

La literatura sobre la interacción del riesgo fiscal y la estabilidad financiera: una revisión

This article presents a review of the literature on aspects of fiscal and financial crises. Firstly, an analysis is made on how fiscal policy may become unsustainable, whether it is due to a worsening of the fundamentals of a country, or to increasing international financial turmoil. Particular attention is paid to the literature on the role of financial institutions and their sovereign links in a crisis context. This link may mean that sovereign stress is transferred to the banks, via holdings of sovereign debt or vice versa, on account of the implicit (or explicit) guarantee that banks may have from the sovereign. Secondly, a review is made of the determining factors of the connectedness amongst financial institutions and between sovereign banks. The indicators of connectedness can help understand how systemic risk builds up. Finally, an analysis is made on how the debate on macro-prudential policy has evolved to tackle the issue of system-wide financial stressEste artículo repasa la literatura académica sobre crisis fiscales y financieras. En primer lugar, se analiza cómo la política fiscal de un país puede acabar siendo insostenible, ya sea por un deterioro de los fundamentales del país o por un aumento de las turbulencias financieras internacionales. Prestamos especial atención a la literatura sobre el papel de las instituciones financieras y su vinculación con el soberano en un contexto de crisis. Este vínculo puede provocar que el estrés del soberano se traslade a las entidades financieras mediante las tenencias de bonos soberanos. La dirección de la transmisión del riesgo puede ser también la contraria, debido a la garantía que ejerce el soberano sobre las entidades financieras de su país.Asimismo, se repasa la literatura sobre la conectividad de instituciones financiares entre sí y entre bancos y soberanos. Los indicadores permiten comprender cómo surge el riesgo sistémico. Finalmente, analizamos cómo el debate sobre la política macro prudencial ha evolucionado en los últimos tiempos

Sovereign Default Risk in the Euro-Periphery and the Euro-Candidate Countries

This study examines the key drivers of sovereign default risk in five euro area periphery countries and three euro-candidates that are currently pursuing independent monetary policies. We argue that the recent proliferation of sovereign risk premiums stems from both domestic and international sources. We focus on contagion effects of external financial crisis on sovereign risk premiums in these countries, arguing that the countries with weak fundamentals and fragile financial institutions are particularly vulnerable to such effects. The domestic fiscal vulnerabilities include: economic recession, less efficient government spending and a rising public debt. External ‘push’ factors entail increasing liquidity- and counter-party risks in international banking, as well as risk-hedging appetites of international investors embedded in local currency depreciation against the US Dollar. We develop a model capturing the internal and external determinants of sovereign risk premiums and test for the examined country groups. The results lead us to caution against premature fiscal consolidation in the aftermath of the global economic crisis, since such policy might actually worsen sovereign default risk. The model works well for the euro-periphery countries; it is less robust for the euro-candidates that upon a future euro adoption will have to pursue real economy growth oriented policies in order to mitigate a potential increase in sovereign default risk

Debt Instruments and Policies in the New Millennium: New Markets and New Opportunities

Spreads on sovereign bonds are at an all-time low, at least since the current era of emerging economy bond markets began in the 1990s. This paper examines the current state of the international and domestic bond markets and asks whether the current favorable trends will constitute a durable change or a temporary fad and discusses what the IDB and other international financial institutions can do to help consolidate the positive trends and prevent new sudden stop episodes in Latin America.

Determinants of sovereign risk premia for European emerging markets

This paper analyses the determinants of the changes in sovereign bond spreads in emerging European markets before and during the recent global financial crisis. In particular, these determinants are associated with changes in market sentiment and in domestic macroeconomic fundamentals. The model was estimated on panel data for eight central and eastern European countries between Q1:2000 and Q2:2010, using least squares and controlling for serial correlation. The results show that the dynamics of spreads can be explained by both market sentiment indicators and macroeconomic fundamentals. In particular, the external imbalances did not exert any discernible effect on spreads prior to the crisis, but became increasingly signifi cant as the crisis broke out