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Sovereign bond market reactions to no-bailout clauses and fiscal rules – The Swiss experience

Lars Feld (), Alexander Kalb, Marc-Daniel Moessinger and Steffen Osterloh ()

Journal of International Money and Finance, 2017, vol. 70, issue C, 319-343

Abstract: We analyse the effects of a credible no-bailout policy and stringent sub-national fiscal rules on the risk premia of Swiss sub-national government bonds in the period from 1981 to 2007. In July 2003, the Swiss Supreme Court decided that the canton of Valais is not liable for municipal debt. This landmark decision reduced cantonal risk premia by about 26 basis points and cut the link between cantonal risk premia and the financial situation of the municipalities that existed before. The result demonstrates that a not fully credible no-bailout commitment can entail high costs for the potential guarantor. Additionally, strong and credible balanced budget rules reduce risk premia.

Keywords: Sub-national government bonds; Fiscal rules; No-bailout clause; Sovereign risk premium (search for similar items in EconPapers)
JEL-codes: E62 G12 H63 H74 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.jimonfin.2016.09.002

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