Sub-national government bonds , fiscal rules , no-bailout clause , sovereign risk premium
Abstract:
We investigate the political determinants of risk premiums which sub-national governments
in Switzerland have to pay for their sovereign bond emissions. For this purpose we
analyse financial market data from 288 tradable cantonal bonds in the period from 1981 to 2007.
Our main focus is on two different institutional factors. First, many of the Swiss cantons have
adopted strong fiscal rules. We find evidence that both the presence and the strength of these
fiscal rules contribute significantly to lower cantonal bond spreads. Second, we study the impact
of a credible no-bailout regime on the risk premia of potential guarantors. We make use of the
Leukerbad court decision in July 2003 which relieved the cantons from backing municipalities in
financial distress, thus leading to a fully credible no-bailout regime. Our results show that this
break lead to a reduction of cantonal risk premia by about 25 basis points. Moreover, it cut the
link between cantonal risk premia and the financial situation of the municipalities in its canton
which existed before. This demonstrates that a not fully credible no-bailout commitment can
entail high costs for the potential guarantor.
Das Dokument wird vom Publikationsserver der Universitätsbibliothek Mannheim bereitgestellt.
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