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Sovereign Reputation and Yield Spreads: A Case Study on Retroactive Legislation

Otto Randl and Josef Zechner

German Economic Review, 2018, vol. 19, issue 3, 260-279

Abstract: This paper uses recent legislation in Austria to establish a link between sovereign reputation and yield spreads. In 2009, Hypo Alpe Adria International, a bank previously co‐owned by the regional government of Carinthia, had been nationalized by Austria's central government in order to avoid a default triggering multi‐billion Euro local government guarantees. In 2015, special legislation retroactively introduced collective action clauses allowing a haircut on both the bonds and the guarantees while avoiding formal default. We document that legislative and administrative action designed to partly abrogate the guarantees resulted in a loss of reputation, leading to higher yield spreads for sovereign debt. Our analysis of covered bonds uncovers an increase in yield spreads on the secondary market and a deterioration of primary market conditions.

Date: 2018
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https://doi.org/10.1111/geer.12128

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German Economic Review is currently edited by Bernhard Felderer, Joseph F. Francois, Ivo Welch, Urs Schweizer and David E. Wildasin

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