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Discussion Paper Details

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Title: Government Bond Risk Premiums in the EU revisited: The Impact of the Financial Crisis

Author(s): Ludger Schuknecht, Jürgen von Hagen and Guido Wolswijk

Publication Date: October 2009

Keyword(s): Bond Markets, Financial Crisis and Sovereign Risk Premiums

Programme Area(s): Public Economics

Abstract: This note looks at US$ and DM/Euro denominated government bond spreads relative to US and German benchmark bonds before and after the start of the current financial crisis. The study finds, first, that bond yield spreads before and during the crisis can largely be explained on the basis of economic principles. Second, markets penalise fiscal imbalances much more strongly after the Lehman default in September 2008 than before. There is also a significant increase in the spread on non-benchmark bonds due to higher general risk aversion, and German bonds obtained a safe-haven investment status similar to that of the US which they did not have before the crisis. These findings underpin the need for achieving sound fiscal positions in good times and complying with the Stability and Growth Pact.

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Bibliographic Reference

Schuknecht, L, von Hagen, J and Wolswijk, G. 2009. 'Government Bond Risk Premiums in the EU revisited: The Impact of the Financial Crisis'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7499