On Creditor Seniority and Sovereign Bond Prices in Europe
CESifo, Munich, 2012
CESifo Working Paper No. 3944
![](https://cesifo.org/DocImg/cesifo1_wp3944.jpg?c=1689237060)
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.
Public Finance
Monetary Policy and International Finance