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

Randl Otto and Josef Zechner
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Randl Otto: WU Vienna University of Economics and Business,Vienna, Austria

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.

Keywords: Reputation; sovereign bonds (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1111/geer.12128

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