Sovereign Default Risk in the Euro-periphery and the Euro-candidate Countries
Hubert Gabrisch, Lucjan T. Orlowski, Toralf Pusch
Journal of Comparative Economics,
2011
Abstract
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The Role of Uncertainty in the Euro Crisis - A Reconsideration of Liquidity Preference Theory
Toralf Pusch
Journal of Post Keynesian Economics,
2013
Abstract
With the world financial crisis came the rediscovery of the active role fiscal policy could play in remedying the situation. More recently, the Euro Crisis, with its mounting funding costs facing governments of a number of Southern EU member states and Ireland, has called this strategy into question. Opposing this view, the main point of this contribution is to elaborate on the link between rising sovereign risk premia in the Eurozone and a major feature of the financial crisis - elevated uncertainty after the Lehman collapse. Theoretically, this link is developed with reference to Keynes' liquidity preference theory. The high explanatory power of rising uncertainty in financial markets and the detrimental effects of fiscal austerity on the evolution of sovereign risk spreads are demonstrated empirically by means of panel regressions and supplementary correlation analyses.
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Financial Crisis Risk, ECB “Non-standard“ Measures, and the External Value of the Euro
Stefan Eichler
Quarterly Review of Economics and Finance,
No. 3,
2012
Abstract
I study the impact of banking and sovereign debt crisis risk of EMU member states on the external value of the euro. Using a regime switching model, I find that the external value of the euro has significantly responded to financial crisis risk during the period of November 2008–November 2011, while no significant effect is found for the period from February 2006 to October 2008. This suggests that the monetary expansion and interest rate cuts associated with the ECB's “non-standard” measures may have reduced the external value of the euro.
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Does the ECB Act as a Lender of Last Resort During the Subprime Lending Crisis?: Evidence from Monetary Policy Reaction Models
Stefan Eichler, K. Hielscher
Journal of International Money and Finance,
No. 3,
2012
Abstract
We investigate whether the ECB aligns its monetary policy with financial crisis risk in EMU member countries. We find that since the outbreak of the subprime crisis the ECB has significantly increased net lending and reduced interest rates when banking and sovereign debt crisis risk in vulnerable EMU countries (Greece, Ireland, Italy, Portugal, and Spain) increases, while no significant effect is identified for the pre-crisis period and relatively tranquil EMU countries (Austria, Belgium, France, Germany, and the Netherlands). These findings suggest that the ECB acts as a Lender of Last Resort for vulnerable EMU countries.
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The Impact of Banking and Sovereign Debt Crisis Risk in the Eurozone on the Euro/US Dollar Exchange Rate
Stefan Eichler
Applied Financial Economics,
No. 15,
2012
Abstract
I study the impact of financial crisis risk in the eurozone on the euro/US dollar exchange rate. Using daily data from 3 July 2006 to 30 September 2010, I find that the euro depreciates against the US dollar when banking or sovereign debt crisis risk increases in the eurozone. While the external value of the euro is more sensitive to changes in sovereign debt crisis risk in vulnerable member countries than in stable member countries, the impact of banking crisis risk is similar for both country blocs. Moreover, rising default risk of medium and large eurozone banks leads to a depreciation of the euro while small banks’ default risk has no significant impact, showing the relevance of systemically important banks with regards to the exchange rate.
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Modelling Country Default Risk as a Latent Variable: A Multiple Indicators Multiple Causes Approach
A. Bühn, Stefan Eichler, Dominik Maltritz
Applied Economics,
No. 36,
2012
Abstract
We study the determinants of country default risk by applying a Multiple Indicators Multiple Causes (MIMIC) model. This accounts for the fact that country default risk is an unobservable variable. Whereas existing (regression-based) approaches typically use only one of several possible country default risk indicators as the dependent variable, the MIMIC model enables us to consider several indicators at once. The simultaneous consideration of sovereign yield spreads and Standard and Poor (S&P) ratings may help to improve the identification of the latent country default risk. Our results confirm most of the literature's main findings regarding important determinants of country default risk, refute others and provide new evidence to controversial questions.
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What Can Currency Crisis Models Tell Us about the Risk of Withdrawal from the EMU? Evidence from ADR Data
Stefan Eichler
Journal of Common Market Studies,
No. 4,
2011
Abstract
We study whether ADR (American depositary receipt) investors perceive the risk that countries such as Greece, Ireland, Italy, Portugal or Spain could leave the eurozone to address financial problems produced by the sub-prime crisis. Using daily data, we analyse the impact of vulnerability measures related to currency crisis theories on ADR returns. We find that ADR returns fall when yield spreads of sovereign bonds or CDSs (credit default swaps) rise (i.e. when debt crisis risk increases); when banks' CDS premiums rise or stock returns fall (i.e. when banking crisis risk increases); or when the euro's overvaluation increases (i.e. when the risk of competitive devaluation increases).
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The ADR Shadow Exchange Rate as an Early Warning Indicator for Currency Crises
Stefan Eichler, Alexander Karmann, Dominik Maltritz
Journal of Banking and Finance,
No. 11,
2009
Abstract
We develop an indicator for currency crisis risk using price spreads between American Depositary Receipts (ADRs) and their underlyings. This risk measure represents the mean exchange rate ADR investors expect after a potential currency crisis or realignment. It makes crisis prediction possible on a daily basis as depreciation expectations are reflected in ADR market prices. Using daily data, we analyze the impact of several risk drivers related to standard currency crisis theories and find that ADR investors perceive higher currency crisis risk when export commodity prices fall, trading partners’ currencies depreciate, sovereign yield spreads increase, or interest rate spreads widen.
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A Dynamic Approach to Interest Rate Convergence in Selected Euro-candidate Countries
Hubert Gabrisch, Lucjan T. Orlowski
IWH Discussion Papers,
No. 10,
2009
Abstract
We advocate a dynamic approach to monetary convergence to a common currency that is based on the analysis of financial system stability. Accordingly, we empirically test volatility dynamics of the ten-year sovereign bond yields of the 2004 EU accession countries in relation to the eurozone yields during the January 2, 2001 untill January 22, 2009 sample period. Our results show a varied degree of bond yield co-movements, the most pronounced for the Czech Republic, Slovenia and Poland, and weaker for Hungary and Slovakia. However, since the EU accession, we find some divergence of relative bond yields. We argue that a ‘static’ specification of the Maastricht criterion for long-term bond yields is not fully conducive for advancing stability of financial systems in the euro-candidate countries.
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The Role of Credit Ratings in Banking Regulations. Credit Ratings Are Insufficiently Anticipating the Risk for Currency Crises.
Tobias Knedlik, Johannes Ströbel
Wirtschaft im Wandel,
No. 10,
2007
Abstract
This contribution analyses whether the behaviour of rating agencies has changed since their failure to predict the Asian crisis. The paper finds no robust econometric evidence that rating agencies have started to take micro-mismatches into account when assigning sovereign ratings. Thus, given the current approach of credit rating agencies, we have reservations concerning the effectiveness of Basel II to prevent the transmission from currency crises to banking crises for potential future crises.
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