Credit Rating and the Cost of Public Debt Service in Central and Eastern European Countries from 2005 to 2017
More details
Hide details
Uniwersytet Łódzki
Submission date: 2018-06-16
Acceptance date: 2019-01-16
Publication date: 2019-03-21
GNPJE 2019;297(1):87-109
The continually growing level of debt in the vast majority of countries worldwide and the resulting significant increase in servicing costs is a major challenge for sovereign debt managers. This paper is part of research on the consequences of a permanent budget imbalance in non-eurozone new European Union member states in Central and Eastern Europe (CEE). The main objective is to investigate what determinants are ultimately associated with changes in the level of debt service costs among the countries selected for the analysis: Poland, the Czech Republic, Hungary, and Romania. Special attention is paid to the impact of credit ratings, which are a key uncertainty indicator that investors take into account when acquiring Treasury securities issued by indebted countries. The study covers the 2005–2017 period, a time frame that includes the latest global financial crisis, which led to a significant increase in spreads on Treasury bonds issued by the studied countries. The empirical part of the paper uses the panel dynamic ordinary least squares method (DOLS). The analysis identifies following determinants of debt servicing costs for selected CEE countries: rating agency reports, the level of volatility implied in the market, the budget deficit, the exchange rate, the debt level, and economic growth. The obtained results carry implications for public debt management policy.
Afonso A., Arghyrou M. G., Kostonikas A. [2012], The determinants of sovereign bond yield spreads in the EMU, Business School – Economics, University of Glasgow Working Papers: 23–32.
Afonso A., Gomes P., Taamouti A. [2014], Sovereign credit ratings, market volatility and financial gains, Computational Statistics and Data Analysis, no. 76: 17.
Alessandrini P., Fratianni M., Hallet A. H., Presbitero A. F. [2014], External imbalances and fiscal fragility in the euro area, Open Economies Review, vol. 25 (1): 3−34.
Alexopulou I., Bunda I., Ferrado A. [2009], Determinants of government bond spreads in new EU countries, ECB Working Paper Series, no. 1093: 45–47.
Arghyrou M., Kontonikas A. [2010], The EMU sovereign – debt crisis: fundamentals, expectations and contagion, Cardiff Economics Working Papers, no. 9: 15.
Assman Ch., Boysen-Hogrefe J. [2011], Determinants of government bond spreads in the euro area: in good times as in bad, Empirica, no. 39: 57–58.
Attinasi M. G., Checherita C., Nickel C. [2009], What explains the surge in euro area sovereign spreads during the financial crisis of 2007–09?, ECB Working Paper, no. 1131: 66.
Baldacci E., Kumar M. [2010], Fiscal deficits, public debt, and sovereign spreads in emerging economies, IMF Working Paper, no. WP/10/184: 74.
Barbosa L., Costa S. [2010], Determinants of sovereign bond yield spreads in the euro area in the context of the economic and financial crisis, Banco de Portugal Working Papers, no. 22: 18.
Barrios S., Iversen P., Lewandowska M., Setzer R. [2009], Determinants of intra-euro area government bond spreads during the financial crisis, European Economy, Economic Papers, no. 388: 34.
Beber A., Brandt M. W., Kavajecz K. A. [2006], Flight to quality or flight to liquidity? Evidence from the euro are bond market, NBER Working Paper, no. 12376: 124–126.
Beirne J., Fratzscher M. [2013], The pricing of sovereign risk and contagion during the European sovereign debt crisis, Journal of International Money and Finance, no. 34: 60−82.
Bernoth K., Erdogan B. [2012], Sovereign bond yields spreads: a time-varying coefficient approach, Journal of International Money and Finance, vol. 31 (5): 639−656.
Bernoth K., Von Hagen J., Schuknecht L. [2012], Sovereign risk premiums in the European government bond market, Journal of International Money and Finance, vol. 31 (5): 975−995.
Caggiano G., Greco L. [2011], Sovereign risk in the euro area: is it mostly fiscal or financial, Mimeo, no. 4: 54.
Chionis D., Pragidis I., Schizas P. [2014], Long-term government bond yields and macroeconomic fundamentals: evidence for Greece during the crisis – era, Finance Research Letters, no. 11: 87–89.
Codogno L., Favero C., Missale A. [2003], Yield spreads on EMU government bonds, Economic Policy, no. 18: 24.
De Grauwe P., Ji Y. [2013], Self-fulfilling crises in the Eurozone: an empirical test, Journal of International Money and Finance, no. 34: 15−36.
De Santis R. [2012], The euro area sovereign debt crisis: safe haven, credit rating agencies and the spread of the fever from Greece, Ireland and Portugal, Working Paper Series European Central Bank, no. 1419: 144.
Ebner A. [2009], An empirical analysis on the determinants of CEE government bond spreads, Emerging Markets Review, no. 10: 45–49.
Edwards S. [1983], LDC foreign borrowing and default risk: an empirical investigation, NBER Working Paper, no. 1172: 168.
Favero C. A. [2013], Modelling and forecasting government bond spreads in the euro area: a GVAR model, Journal of Econometrics, vol. 177 (2): 343−356.
Ferucci P. [2003], Empirical determinants of emerging market economies’ sovereign bond spreads, Bank of England Working Papers, no. 205: 187.
Georgoutsos D. A., Migiakis P. M. [2013], Heterogeneity of the determinants of euro-area sovereign bond spreads; what does it tell us about financial stability?, Journal of Banking & Finance, no. 37: 89.
Gibson H. D., Hall S. G., Tavlas G. S. [2012], The Greek financial crisis: growing imbalances and sovereign spreads, Journal of International Money and Finance, vol. 31 (3): 498−516.
Gibson H. D., Hall S. G., Tavlas G. S. [2015], Are all sovereigns equal? A test of the common determinantion of sovereign spreads in the euro area, Empirical Economics, vol. 48 (3): 939−949.
Giordano R., Pericoli M., Tommasino P. [2013], Pure or wake-up call contagion? Another look at the EMU sovereign debt crisis, International Finance, vol. 16 (2): 131−160.
Goldberg L., Leonard D. [2003], What moves sovereign bond markets? The effercts of economic news on US and German yields, Federal Reserve Bank of New York, Current Issues in Economics and Finance, vol. 9 (9): 45.
Gonzales-Rozada M., Yeyati E. L. [2008], Global factors in emerging market spreads, The Economic Journal, no. 118: 17.
Gómez-Puig M., Sosvilla-Rivero S., del. C. Carmen Ramos-Herrera M. [2014], An update on EMU sovereign yield spread drivers in times of crisis: a panel data analysis, Institute of Applied Economics Working Paper, no. 7: 32.
Grabowski W., Stawasz E. [2016], Determinanty rentowności obligacji skarbowych peryferyjnych krajów strefy euro w warunkach stabilności i kryzysu, Bank i Kredyt, nr 47 (2): 119–136.
Haugh D., Ollivaud P., Turner D. [2009], What drives sovereign risk premiums? An analysis of recent evidence from the euro area, OECD Economics Department Working Papers, no. 718: 102.
Heinz F. F., Sun Y. [2014], Sovereign CDS spreads in Europe – the role of global risk aversion, economic fundamentals, liquidity, and spillovers, IMF Working Paper, no. WP/14/17: 45.
Jaramillo L., Weber A. [2013], Bond yields in emerging economies: it matters what state you are in, Emerging Markets Review, no. 17: 23.
Kao Ch., Chiang M. H. [1999], On the estimation and inference of a cointegrated regression in panel data, Center for Policy Research Working Papers, no. 3: 57.
Koronowski A. [2011], Kryzys finansów publicznych czy kryzys płatniczy krajów PIIGS, Gospodarka Narodowa, nr 5−6: 69−84.
Kujawski L., Mrzygłód U., Zamojska A. [2015], Determinanty rentowności obligacji skarbowych Polski i wybranych krajów europejskich w latach 2005–2013, NBP, Materiały i Studia, nr 313: 8.
Ludvigson S. C., Ng S. [2005], Macro factors in bond risk premia, NBER Working Paper, no. 11703: 27–29.
Maltritz D. [2012], Determinants of sovereign yield spreads in the Eurozone: a Bayesian approach, Journal of International Money and Finance, vol. 31 (3): 757−772.
Manganelli S., Wolswijk G. [2009], What drives spreads in the euro area government bond market?, Economic Policy, no. 58: 191–240.
Oliveira L., Curto J. D., Nunes J. P. [2012], The determinants of sovereign credit spread changes in the euro-zone, Journal of International Financial Markets, Institutions and Money, vol. 22 (2): 278−304.
Pedroni P. [2001], Purchasing power parity tests in cointegrated panels, Review of Economics and Statistics, vol. 83 (4): 727−731.
Peiris S. J. [2010], Foreign participation in emerging markets’ local currency bond markets, IMF Working Paper, no. WP/10/88: 16–17.
Poghosyan T. [2012], Long-run and short-run determinants of sovereign bond yields in advanced economies, IMF Working Paper, no. WP/12/271: 25–26.
Saikkonen P. [1992], Estimation and testing of cointegrated systems by an autoregressive approximation, Econometric Theory, no. 8: 1–27.
Schuknecht L., von Hagen J., Wolswijk G. [2010], Government bond risk premiums in the EU revisited. The impact of the financial crisis, ECB Working Paper, no. 2010/1152: 8–10.
Sgherri S., Zoli E. [2009], Euro area sovereign risk during the crisis, IMF Working Paper, no. 9/222: 234–236.
Stock J., Watson M. [1993], A simple estimator of cointegrating vectors in higher order integrated systems, Econometrica, vol. 61 (4): 783–820.
Strzała K. [2009], Panelowe testy stacjonarności – możliwości i ograniczenia, Przegląd Statystyczny, r. LVI, z. 1: 34–37.
Journals System - logo
Scroll to top