Sovereign bond market reactions to no-bailout clauses and fiscal rules – The Swiss experience |
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| Institution: | 1. Walter Eucken Institut and University of Freiburg, Goethestrasse 10, Freiburg im Breisgau, Germany;2. BayernLB, Brienner Strasse 18, 80333 München, Germany;3. ZEW Mannheim, L7,1, 68161 Mannheim, Germany;4. European Central Bank, Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany;1. Walter Eucken Institute, Goethestr. 10, 79100 Freiburg, Germany;2. Albert-Ludwigs-University Freiburg, Platz der Alten Synagoge, 79085 Freiburg, Germany;1. BBVA Research, Spain;2. John E. Walker Department of Economics, Clemson University, United States;3. Department of Business Administration, Universidad Carlos III de Madrid, Spain;1. Regional Economic Research Staff, Ancona Branch, Banca d''Italia, Piazza Kennedy, 9 - 60122 Ancona, Italy;2. Central Bank Operations Department, Public Debt Division, Banca d''Italia, Via Nazionale 91 - 00184 Rome, Italy |
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| Abstract: | We analyse the effects of a credible no-bailout policy and stringent sub-national fiscal rules on the risk premia of Swiss sub-national government bonds in the period from 1981 to 2007. In July 2003, the Swiss Supreme Court decided that the canton of Valais is not liable for municipal debt. This landmark decision reduced cantonal risk premia by about 26 basis points and cut the link between cantonal risk premia and the financial situation of the municipalities that existed before. The result demonstrates that a not fully credible no-bailout commitment can entail high costs for the potential guarantor. Additionally, strong and credible balanced budget rules reduce risk premia. |
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