Discussion

ECB Public Finance Workshop, 29 January 2010
Discussion of
Barrios, Iversen, Lewandowska and Setzer (2009)
Gerlach, Schulz and Wolff (2009)
Afonso and Rault (2009)
By Javier J. Pérez (Banco de España)
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Discussion
Related literature
The three papers are framed in a recent explosion of the literature on the
analysis of the determinants of sovereign bond spreads – some wellknown facts
- Dominant role of “international risk”
- Role of “liquidity”
- Role of “fundamentals”, in particular fiscal variables
- Difficult to draw country-specific lessons
Something new to be learnt from these papers?
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Discussion
The papers
Barrios, Iversen, Lewandowska and Setzer (2009)
Focus on crisis period (2007-2009, weekly), but also pre-crisis 2003-07 (quarterly)
Confirm previous results on aggregate risk, gov debt levels and expected deficits
Robust results: estimation techniques, specifications and time spans; country results.
Gerlach, Schulz and Wolff (2009)
Focus on EMU period (1999-2009)
Confirm previous results on aggregate risk, gov debt levels and expected deficits
New determinants: size and vulnerability of banking sector
Afonso and Rault (2009)
Focus on 1973-2008 period, OECD countries
Confirm previous results on aggregate risk, gov debt levels and expected deficits
Focus on yields rather than spreads
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Discussion
Policy issues
From a policy perspective, what type of issues may one would like to find?
- What would be the costs of delaying “fiscal consolidation”?
- what increase in interest rates? what impact on economic growth and the
costs of government debt financing?
- Role of “fundamentals” vs “aggregate risks measures”
- was the “financial crisis period” different?
- will the “post-financial period” be different? (exit period)
- Does euro area membership make a difference? (EA vs US vs Japan)
-Country-specific lessons from this literature?
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Discussion
Issues
Banking channel – interesting argument (spread – financial sector vulnerability
– larger contingent liability on govn’ts shoulders) also pointed out by Mody (09)
- Strange result as the authors claim that it holds always, even in the 1999-2006
period (Mody’s argument only in crisis period).
- Also: this argument may also apply to any industry – see subsidies to car makers or
even nationalisatin of firms (US); lack of strong theoretical grounds
- Contradicts certain anecdotical evidence: explicit and implicit guarantees and
interventions were more important in “core” countries (DE, NL, FR) than “non-core”
(GR, ES, IT, PT).
-Reverse causality might be an issue: ↑ debt - ↑ spread - ↑ vulnerability of banks (less
government support expected)
- Why not using a “true exogenous” measure of banking stress, like announcements…
(see Attinasi et al., 2009 for the “crisis” period)
- Alternative (beyond “size of banking sector”): take a measure of contingent liabilities
(ageing costs, from EU reports, …)
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Discussion
Issues
Related to sample
- For long sample periods (Afonso & Rault), non-linear effects (crisis / noncrisis times) or “switching” explanatory factors (time-varying weights).
- The euro area period (Gerlach, Schulz and Wolff): little variation in spreads
[see chart] – role of country fixed-effects?
- Difficult to get sensible results on the impact of “macro fundamentals” even
using quartery data, given a short time span (2003-2009) dominated by the
strong downturn (Barrios et al.).
A proper forecasting exercise is absent – in-sample validation is not
enough to test the ability of the models.
In Afonso & Rault, not clear the gain of showing country-specific results
(appear to be quite sensitive to the specification – “X’s”)
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Discussion
Issues
The euro area sample period
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Discussion
Issues
Fiscal variables and other “macro fundamentals”
- Historical data affected by revisions – the relevant information set should
be the one available to investors at the time, not the expost, final data
(annual and quarterly data).
- The relevant pieces of information are the “news” in real-time (timing of
publication is crucial).
- This also affects (deficit) forecasts: expected deficits are news to the
market, and are updated every 2-3 months (SGPs, EDPs, EC, IMF, OECD,
Consensus…) – the whole forecast path is linked
- In addition, the use of annual/quarterly fiscal data in regressions with
weekly data might be problematic (little variation over time)
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Discussion
Lessons
The crisis as a device to return to “more normal” pricing of risks
- Country-specific factors seem to start playing a role (not-significant in precrisis period)
Sensitivity to fiscal variables might have increased in the “new regime”
Important to pay attention to the (vulnerability) of the banking sector and
size of implicit liabilities (not clear, but there seem to be something)
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THANKS FOR YOUR ATTENTION
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