Euro Area Government Bonds

The paper analyzes the integration of euro area sovereign bond markets during the European sovereign debt crisis. It tests for contagion (i.e., an intensification in the transmission of shocks across countries), fragmentation (a reduction in spillovers) and flight-to-quality patterns, exploiting the heteroskedasticity of intraday changes in bond yields for identification. The paper finds that euro area government bond markets were well integrated prior to the crisis, but saw a substantial fragmentation from 2010 onward. Flight to quality was present at the height of the crisis, but has largely dissipated after the European Central Bank's (ECB's) announcement of its Outright Monetary Transactions (OMT) program in 2012. At the same time, Italy and Spain became more interdependent after the OMT announcement, providing our only evidence of contagion. While this suggests that countries have been effectively ring-fenced, and Italy and Spain benefited from the joint reduction in yields following the OMT announcement, the high current degree of fragmentation poses difficult challenges for policy-makers, since it leads to an unequal transmission of the ECB's monetary policy to the various countries.

Government Bond Markets in the Euro Zone explains how Government bond markets work and the features and specifications of each type. This book studies, in detail, the structure and techniques of bond markets in each EU country, the financial instruments issued by each treasury agency and also the primary and secondary Government bonds markets. Also included is information on clearing and settlement systems, fiscal treatment of Government bonds, market makers and other features within the markets.

This presents the most recent developments in the Euro bond market. It discusses the problems of the Euro countries, the proposed solutions advocated by European as well as international institutions and investors. Particular emphasis is given to systemic risk and contagion as well as to specific innovative instruments such as structured financial products which protect various classes of investors.

This Selected Issues paper discusses the risks of low growth and inflation over the medium term for the euro area. It examines the consequences of longer term trends that predate the crisis and the progress made in addressing the crisis legacies of high unemployment and debt. The paper illustrates, in a downside scenario, how low potential growth and crisis legacies leave the euro area vulnerable to the risks of stagnation. The weak medium-term prospect and limited policy space leave the euro area vulnerable to shocks that could lead to a prolonged period of low growth and inflation. Model simulations suggest that a modest shock to investor confidence could push up risk premia and real interest rates, as policy space is constrained at the zero lower bound and fiscal policy space to provide stimulus is limited. Moreover, the lingering crisis legacies of high debt and unemployment could amplify the original shocks, creating a bad feedback loop and keeping the economy stuck in equilibrium of stagnation.

While the use of public resources is critical to cushion the impact of the financial crisis on the euro-area economy, it is key that the entailed fiscal costs not be seen by markets as undermining fiscal sustainability. From this perspective, to what extent do movements in euro area sovereign spreads reflect country-specific solvency concerns? In line with previous studies, the paper suggests that euro area sovereign risk premium differentials tend to comove over time and are mainly driven by a common time-varying factor, mimicking global risk repricing. Since October 2008, however, there is evidence that markets have become progressively more concerned about the potential fiscal implications of national financial sectors' frailty and future debt dynamics. The liquidity of sovereign bond markets still seems to play a significant (albeit fairly limited) role in explaining changes in euro area spreads.

Studienarbeit aus dem Jahr 2020 im Fachbereich BWL - Bank, Börse, Versicherung, Note: 1,0, FOM Essen, Hochschule für Oekonomie & Management gemeinnützige GmbH, Hochschulleitung Essen früher Fachhochschule, Sprache: Deutsch, Abstract: This paper is about the European Central Bank Monetary Policy and the View of the Sovereign Debt Crisis. „Whatever it takes“– three simple but effective words had the desired effect and calmed the government bond markets in the summer of 2012, whose developments in the wake of the European sovereign debt crisis had led to immense financing difficulties for some member states of the euro area. Even more, the statement by Mario Draghi, then president of the European Central Bank (ECB), underlined the determination with which the ECB is willing to prevent a possible break up of the euro area. The measures taken by the ECB have included interest rate cuts, negative interest rates and purchase programmes of various assets. However, the ECB's measures did not meet with the exclusive approval of experts, they sometimes caused harsh public criticism and even the judiciary, in form of the Bundesverfassungsgericht (German Federal Constitutional Court) and the European Court of Justice (ECJ), had to address the issue. Against this background, this assignment aims to examine whether the monetary policy of the ECB infringes Article 123 (1) Treaty on the Functioning of the European Union (TFEU) which states the prohibition on monetary financing of member state budgets. To begin with, the origins of the European sovereign debt crisis are explained. The paper then outlines selected non-standard monetary policy measures taken by the ECB to mitigate the effects of the crisis, in form of Outright Money Transactions (OMTs) and the Public Sector Purchase Programme (PSPP). The fourth chapter focuses on the PSPP and analyses the programme against the background of Article 123(1) TFEU.

Master's Thesis from the year 2010 in the subject Economics - Finance, grade: 80, University of Brighton, course: International Financial Markets, language: English, abstract: As the European Union emerges from its worst recession since the Second World War, it has to tackle an equally pressing issue: a sovereign debt crisis. Yield spreads in Greece, Portugal, Ireland and Spain have soared. The era of cheap government borrowing and integrated euro area (EA) government bond markets appears to be over, and fractures in EA solidarity are present. This dissertation seeks to update existing literature by assessing the current state of government bond market integration in the EA. Results suggest that many years of financial integration in EA government bond markets has been reversed in a few months, and that the status quo is not sustainable for the peripheral member countries. Unless Greece, Portugal, Ireland and (to a lesser extent) Spain adopt significant microeconomic structural reforms to regain long-lost competitiveness vis-à-vis the EA’s core (notably Germany), whilst at the same time avoid falling back into deep recession, the Euro project will not be able to continue in its current form.

"This paper provides an empirical analysis of the determinants of government bond yield spreads in the euro area with a focus on developments during the global financial crisis that started in 2007. In line with the previous literature, we find that international factors, in particular general risk perception, play a major role in explaining governments bond yields differentials. While domestic factors such as liquidity and sovereign risk appear to be smaller but non-negligible drivers of yield spreads our results point to significant interaction of general risk aversion and macroeconomic fundamentals. Moreover, the impact of domestic factors on bond yield spreads increase significantly during the crisis, when international investors started to discriminate more between countries. In particular, the combination of high risk aversion and large current account deficits tend to magnify the incidence of deteriorated public finances on government bond yield spreads. Overall, our results suggest that an improvement in global risk perception will lead to a narrowing of intra-euro area bond yield differentials. However, the differing impact of the crisis on Member States' public finances and the expected higher risk awareness of investors after the crisis could keep government bond yield spreads at a higher level then in the pre-crisis period."--Publication information page.

This paper documents and analyzes crisis-related changes in government debt issuance practices in the 16 euro zone countries and Denmark. Using a newly constructed database on primary market debt issuance during 2007-09, we find evidence of a shift away from pre-crisis standards of best funding practices competitive auctions of debt instruments with a fixed coupon, long maturity and local currency denomination (DLTF). Exploiting the cross-country panel data dimension of the data, we conclude that the crisis and related changes in the macroeconomic environment and investor sentiment can account for a significant proportion of the deviation. The negative effect of the crisis on DLTF debt issuance was especially pronounced in high deficit and high debt euro area countries, and has forced governments to assume additional risk.

This paper introduces a new dataset on the composition of the investor base for government securities in the G20 advanced economies and the euro area. During the last decades, investors from abroad have increased their presence in government bond markets. The financial crisis broke this trend. Domestic financial institutions allocated a larger share of government securities in their portfolios, as Japan has done since its crisis in the 1990s. Increases in the share held by institutional investors or non-residents by 10 percentage points are associated with a reduction in yields by about 25 or 40 basis points, respectively. The data show a varied lead-lag relationship between bond yields and investor holdings. Portfolio balance estimates suggest that a change in statutory or regulatory holdings of government securities to the tune of 10 percent of the outstanding stock causes expected returns to decline by 7 to 25 basis points.