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Importance of Fiscal Fundamentals for Sovereign Risk Spread

Importance of Fiscal Fundamentals for Sovereign Risk Spread

Irena Szarowská
Copyright: © 2018 |Pages: 20
ISBN13: 9781522540267|ISBN10: 1522540261|EISBN13: 9781522540274
DOI: 10.4018/978-1-5225-4026-7.ch007
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MLA

Szarowská, Irena. "Importance of Fiscal Fundamentals for Sovereign Risk Spread." Regaining Global Stability After the Financial Crisis, edited by Bruno Sergi, et al., IGI Global, 2018, pp. 127-146. https://doi.org/10.4018/978-1-5225-4026-7.ch007

APA

Szarowská, I. (2018). Importance of Fiscal Fundamentals for Sovereign Risk Spread. In B. Sergi, F. Fidanoski, M. Ziolo, & V. Naumovski (Eds.), Regaining Global Stability After the Financial Crisis (pp. 127-146). IGI Global. https://doi.org/10.4018/978-1-5225-4026-7.ch007

Chicago

Szarowská, Irena. "Importance of Fiscal Fundamentals for Sovereign Risk Spread." In Regaining Global Stability After the Financial Crisis, edited by Bruno Sergi, et al., 127-146. Hershey, PA: IGI Global, 2018. https://doi.org/10.4018/978-1-5225-4026-7.ch007

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Abstract

The chapter examines the importance of fiscal fundamentals for sovereign risk spread in the period of 1995-2015, and its goal is to test whether stronger fiscal discipline reduces sovereign risk premiums. The empirical evidence is based on unbalanced annual panel data of 15 EU countries (its time span is divided into a pre-crisis and a post-crisis period). The study applies the generalized method of moments. Evidence shows that before the financial crisis, investors generally ignored bond risk factors in individual countries, but that the spreads sharply diverged starting from the year 2008. The results confirm a statistically significant impact of fiscal fundamentals on government bond yield spread. The improvement of the governments' fiscal position reduces sovereign yield spread. In a post-crisis period, findings report the raising of the importance of fiscal variables for spread, and GDP growth became a major determinant of government bond yield spreads, followed by the budget balance and debt development.

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