How Do Political Factors Shape the Bank Risk-Sovereign Risk Nexus in Emerging Markets?
Review of Development Economics,
This paper studies the role of political factors for determining the impact of banking sector distress on sovereign bond yield spreads for a sample of 19 emerging market economies in the period 1994–2013. Using interaction models, I find that the adverse impact of banking sector distress on sovereign solvency is less pronounced for countries with a high degree of political stability, a high level of power sharing within the government coalition, a low level of political constraint within the political system, and for countries run by powerful and effective governments. The electoral cycle pronounces the bank risk–sovereign risk transfer.
06.07.2017 • 28/2017
Politicians share responsibility for the risk of their state defaulting
Investors assume higher risks of default when a country is politically unstable or governed by a party at the left or right end of the political spectrum. However, according to findings obtained by Stefan Eichler from the Halle Institute for Economic Research (IWH), the more democratic the country is and the more it is integrated into the global economy, the lower is the impact that such political factors have.
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Politische Determinanten staatlicher Ausfallrisiken
Wirtschaft im Wandel,
Staatliche Zahlungsausfälle haben nicht selten politische Ursachen. Während ökonomische Rahmenbedingungen wie etwa Wirtschaftswachstum, Finanzstabilität oder globale Investorenstimmungen die Zahlungsfähigkeit eines Staates beeinflussen, wird die tatsächliche Rückzahlung von Staatsschulden letztendlich von der einheimischen Regierung entschieden. Die Zahlungswilligkeit einer Regierung spielt daher eine entscheidende Rolle für das Risiko eines staatlichen Zahlungsausfalls. In diesem Artikel wird der Einfluss politischer Faktoren auf das staatliche Ausfallrisiko für 27 Schwellen- und Entwicklungsländer im Zeitraum von 1996 bis 2009 untersucht. Die Auswertung von Anleihedaten zeigt, dass Investoren ein höheres Ausfallrisiko fürchten, falls ein Land politisch instabil ist oder von einer Rechts- bzw. Linkspartei regiert wird. Der Einfluss politischer Faktoren auf das staatliche Ausfallrisiko eines Landes sinkt mit dessen Grad an Demokratie und Integration in die Weltwirtschaft.
The political determinants of government bond holdings
Journal of International Money and Finance,
This paper analyzes the link between political factors and sovereign bond holdings of US investors in 60 countries over the 2003–2013 period. We find that, in general, US investors hold more bonds in countries with few political constraints on the government. Moreover, US investors respond to increased uncertainty around major elections by reducing government bond holdings. These effects are particularly significant in democratic regimes and countries with sound institutions, which enable effective implementation of fiscal consolidation measures or economic reforms. In countries characterized by high current default risk or a sovereign default history, US investors show a tendency towards favoring higher political constraints as this makes sovereign default more difficult for the government. Political instability, characterized by the fluctuation in political veto players, reduces US investment in government bonds. This effect is more pronounced in countries with low sovereign solvency.
Why They Keep Missing: An Empirical Investigation of Rational Inattention of Rating Agencies
IWH Discussion Papers,
Sovereign ratings have frequently failed to predict crises. However, the literature has focused on explaining rating levels rather than the timing of rating announcements. We fill this gap by explicitly differentiating between a decision to assess a country and the actual rating decision. Thereby, we account for rational inattention of rating agencies that exists due to costs of reassessment. Exploiting information of rating announcements, we show that (i) the proposed differentiation significantly improves estimation; (ii) rating agencies consider many nonfundamental factors in their reassessment decision; (iii) markets only react to ratings providing new information; (iv) developed countries get preferential treatment.
Sovereign Credit Risk Co-Movements in the Eurozone: Simple Interdependence or Contagion?
We investigate credit risk co-movements and contagion in the sovereign debt markets of 17 industrialized countries during the period 2008–2012. We use dynamic conditional correlations of sovereign credit default swap spreads to detect contagion. This approach allows us to separate contagion channels from the determinants of simple interdependence. The results show that, first, sovereign credit risk co-moves considerably, particularly among eurozone countries and during the sovereign debt crisis. Second, contagion varies across time and countries. Third, similarities in economic fundamentals, cross-country linkages in banking and common market sentiment constitute the main channels of contagion.
Banks and Sovereign Risk: A Granular View
Journal of Financial Stability,
We investigate the determinants of sovereign bond holdings of German banks and the implications of such holdings for bank risk. We use granular information on all German banks and all sovereign debt exposures in the years 2005–2013. As regards the determinants of sovereign bond holdings of banks, we find that these are larger for weakly capitalized banks, banks that are active on capital markets, and for large banks. Yet, only around two thirds of all German banks hold sovereign bonds. Macroeconomic fundamentals were significant drivers of sovereign bond holdings only after the collapse of Lehman Brothers. With the outbreak of the sovereign debt crisis, German banks reallocated their portfolios toward sovereigns with lower debt ratios and bonds with lower yields. With regard to the implications for bank risk, we find that low-risk government bonds decreased the risk of German banks, especially for savings and cooperative banks. Holdings of high-risk government bonds, in turn, increased the risk of commercial banks during the sovereign debt crisis.
Brown Bag Seminar
Brown Bag Seminar Financial Markets Department The seminar series "Brown...
The Joint Dynamics of Sovereign Ratings and Government Bond Yields
Deutsche Bundesbank Discussion Papers,
Can a negative shock to sovereign ratings invoke a vicious cycle of increasing government bond yields and further downgrades, ultimately pushing a country toward default? The narratives of public and political discussions, as well as of some widely cited papers, suggest this possibility. In this paper, we will investigate the possible existence of such a vicious cycle. We find no evidence of a bad long-run equilibrium and cannot confirm a negative feedback loop leading into default as a transitory state for all but the very worst ratings.
Reports of the European Forecasting Network (EFN)
Reports of the European Forecasting Network (EFN) The European Forecasting...