European policy and markets: Did policy initiatives stem the sovereign debt crisis in the euro area?

We investigate how European policy initiatives influenced market assessments of sovereign default risk and banking sector fragility during the sovereign debt crisis in four adversely affected countries — Portugal, Ireland, Spain and Italy. We focus on three broad groups of policies: (a) ECB policy a...

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Bibliographic Details
Published in:European Journal of Political Economy 2019-03, Vol.57, p.3-21
Main Authors: Bergman, U. Michael, Hutchison, Michael M., Hougaard Jensen, Svend E.
Format: Article
Language:English
Subjects:
Banking
Banking system
Bond markets
Bonds
Dynamic assessment
E42
E44
Economic crisis
EU policy initiatives
Euro
Euro crisis
External debt
F36
F42
Financial support
G14
H63
International finance
Markets
National debt
Political economy
Public debt
Risk assessment
Risk perception
Safety
Sovereign debt
Transactions
Transmission of policy news
Work
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Description
Summary:We investigate how European policy initiatives influenced market assessments of sovereign default risk and banking sector fragility during the sovereign debt crisis in four adversely affected countries — Portugal, Ireland, Spain and Italy. We focus on three broad groups of policies: (a) ECB policy actions (monetary and financial support), (b) EU programs (financial and fiscal rules as well as financial support in crisis countries), and (c) domestic austerity programs. We measure immediate market impact effects: what policies changed risk perceptions, using CDS spreads on sovereign bonds and banks in this assessment. We employ dynamic panel and event study methodologies in the empirical work. We find that a number of programs initially stabilized sovereign and bank bond markets (e.g. Outright Monetary Transactions program), although announcement and implementation impacts on markets differed in some cases (e.g. second Covered Market Bond Program). Actions designed to shore up sovereign markets often lowered risk assessments in bank bond markets and policies designed to ensure safety and soundness of the European banking system in some cases significantly impacted sovereign debt markets. Finally, a number of policies designed to stabilize markets had surprisingly little immediate impact on either sovereign or bank bond market risk assessments.
ISSN:0176-2680
1873-5703
DOI:10.1016/j.ejpoleco.2018.06.003