Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/65389 
Year of Publication: 
2012
Series/Report no.: 
CESifo Working Paper No. 3944
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
The recent increase of interest rate spreads in Europe and their apparent detachment from underlying fundamental variables has generated a debate on multiple equilibria in the sovereign bond market (see De Grauwe and Ji (2012)). We critically evaluate this hypothesis, by pointing towards an alternative explanation: the increasing share of senior lenders (IMF, ECB, EFSF, etc.) in the total outstanding government debt of countries in crisis. We illustrate the close relationship between senior tranche lending - including Target2 balances - and recent developments in the sovereign bond market, both graphically and in a formal regression analysis.
Subjects: 
government bond spreads
Eurozone
senior tranche lending
multiple equilibria
sovereign debt crisis
Target2
JEL: 
F34
G12
H81
Document Type: 
Working Paper
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