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The objective of this paper is to determine the effects of the European debt crisis on the European government bonds.
Abstract
Purpose
The objective of this paper is to determine the effects of the European debt crisis on the European government bonds.
Design/methodology/approach
In this paper, we present the European government bond; we explain the European debt crisis; and we examine the evolution of the European debt.
Findings
Our results suggest that the increase of the European debt contributed to the increase of the risk and the default of the European debt and to the depreciation of the economies of the European countries.
Originality/value
We calculate the value of the European debt risks in normal cases and in the case of crisis with normal distribution.
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Alexey Zhukovskiy, Heidi Falkenbach and Ranoua Bouchouicha
This paper aims to examine the relationship between the use of public debt and investment activity of European listed real estate companies.
Abstract
Purpose
This paper aims to examine the relationship between the use of public debt and investment activity of European listed real estate companies.
Design/methodology/approach
Using a hand-collected sample of debt structures of 102 European public real estate companies, and using European Central Bank lending standards survey as a proxy for bank credit availability, the authors test a conditional hypothesis on the relationship between investment rates and the use of public debt during period of constrained bank lending environment in Europe.
Findings
The results show that ex ante diversification of debt allows retaining higher investment rates when the main source of debt, bank lending, is shrinking. The effect is statistically and economically significant and increases during times of tight bank lending constraints. The authors find no support to debt capacity explanation of the effect. They neither find support of the higher investment rates to be indicative of overinvestment problem. The results are robust to alternative model specifications and estimators.
Research limitations/implications
The empirical analysis is limited to Europe.
Practical implications
Investments and the growth of real estate companies depend on their ability to seize value-increasing opportunities that arise in the competitive markets. This paper evaluates the role of a diversified debt structure in this context. The results suggest that debt structure can have material importance for the investment activity of European listed real estate companies and issuance of public debt can help companies to counterbalance the negative effects of restricted bank loan supply on the investment levels.
Originality/value
The paper extends the literature on debt structures of listed real estate firms by considering the effect of debt diversification on investments.
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The purpose of this paper is to discuss and evaluate the sovereign default restructuring options in the European Monetary Union (EMU).
Abstract
Purpose
The purpose of this paper is to discuss and evaluate the sovereign default restructuring options in the European Monetary Union (EMU).
Design/methodology/approach
The paper examines financial policy options from a politico‐economic‐legal perspective. It relies primarily on secondary data analysis.
Findings
Sovereign default restructuring an unthinkable phenomenon in the hitherto affluent EMU could now be a possibility because of the lack of political cohesion and the realities of two‐speed European Union.
Research limitations/implications
The paper relies extensively on secondary data. Future research through empirical multiple case studies would enrich the insights of this paper.
Practical implications
Insights from the paper would be of benefit to lawmakers, financial supervisors, financial institutions and investors in general.
Originality/value
The paper's main value lies in its use of multiple lenses to evaluate a serious financial issue in the EMU.
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James R. Barth, Apanard (Penny) Prabha and Greg Yun
The purpose of this paper is to discuss and then analyze the interdependency between bank and sovereign risk before, during and after the financial crisis.
Abstract
Purpose
The purpose of this paper is to discuss and then analyze the interdependency between bank and sovereign risk before, during and after the financial crisis.
Design/methodology/approach
The authors' approach is based upon an examination of 44 large banks headquartered in 13 countries; eight of these countries belong to the European Union, seven belong to the eurozone, and the remaining five belong to neither group. This provides a good comparison group of countries.
Findings
Evidence is found supporting the existence of significant bank and sovereign risk linkages. There are, however, different patterns in the relationships across countries and even across banks within the same country. Also, higher correlations between bank and sovereign risk are found in countries in which the ratio of the assets of banks relative to their home country's GDP is relatively high.
Research limitations/implications
Based upon the empirical results, allowing banks to invest in sovereign debt without requiring them to hold any capital against the “true” risk of such debt increases the likelihood of insolvency. This means that interdependencies between bank and sovereign risk are extremely important when setting regulatory capital requirements and considering whether action is needed to limit any increase in the likelihood of contagion.
Originality/value
The paper provides a new examination of the interdependencies between individual bank risk and the sovereign risk of the countries in which they are headquartered, with special emphasis on the recent global financial and eurozone crises.
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Catarina Proença, Maria Neves, José Carlos Dias and Pedro Martins
This paper aims to study the determinants of the sovereign debt ratings provided by the 3 main rating agencies for 32 European countries. It verifies the clusters of countries…
Abstract
Purpose
This paper aims to study the determinants of the sovereign debt ratings provided by the 3 main rating agencies for 32 European countries. It verifies the clusters of countries existing for each of the agencies, considering regional bias, and then analyzes whether the determinants were different before and after the global financial crisis. It also aims to explain how the determinants are taken into account for rich and developing countries, using a sample for the period between 2001 and 2008 and the period between 2009 and 2016.
Design/methodology/approach
To this purpose, this paper performs panel data estimation using an ordered Probit approach.
Findings
This method shows that for developing countries after the crisis, the relevant explanatory variables are the unemployment rate and the presence in the Eurozone. For rich countries, the inflation rate is pivotal after the crisis period.
Originality/value
This paper is the first to use a clustering methodology within sovereign debt rating literature, grouping the countries into cohesive clusters according to their sovereign debt ratings along with the proposed time frame. Moreover, it explains, which countries belong to strong or weak groups, according to the rating agencies under discussion; and, in these groups, it identifies the sovereign rating determinants.
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The paper examines the impact of the deteriorating fiscal conditions of Eurozone countries on spillover effects on bank credit margins. It is investigated whether these effects…
Abstract
Purpose
The paper examines the impact of the deteriorating fiscal conditions of Eurozone countries on spillover effects on bank credit margins. It is investigated whether these effects have been reduced after European Central Bank’s (ECB) signaling of pursuing an expansionary, unconventional, monetary policy to address the debt crisis in Eurozone.
Design/methodology/approach
A general econometric panel model is applied to investigate spillover effects between Eurozone countries and bank credit margins. In total, three periods are examined: the period before the peak of the global financial crisis and the beginning of the Irish banking crisis, the period during the debt and bank crisis in Eurozone and the period after ECB's signaling of extremely aggressive monetary easing.
Findings
According to empirical results, before the peak of the global financial crisis there was no substantial credit risk transfer from Eurozone sovereigns to banks. During the period of debt and bank crisis in Eurozone, the deterioration of the fiscal situation of Eurozone countries had a significant impact on bank Credit Default Swap (CDS) spreads. After ECB's signaling of extremely aggressive monetary easing, it does not seem to be any significant relationship between Eurozone sovereigns and bank CDS spreads. These findings reinforce the assessment that ECB's measures were effective, achieving the key objective of normalizing economic conditions and ensuring financial stability in Eurozone.
Research limitations/implications
A question is whether effects can change when the corresponding contraction will lead to a reinstatement of “normal” conditions. Would there be a reversal of risk premium trends in bond markets? Although the answer from casual observations seems to be negative, it is a valid research question to be examined. An interesting issue concerning the unconventional monetary policy measures implemented by ECB concerns the issues of moral hazard that they incorporate, something that could not be addressed. Another research perspective could be the use of the beta coefficient to measure the systematic and unsystematic risk of banking sector shares.
Practical implications
The results have strong implications for ECB and European banking regulation. Regulators should mainly pay more attention to the amount and concentration of sovereign debt held by banks. Eurozone financial system could be less vulnerable to the sovereign credit risk. It raised the critical question of whether a more strict regulation is needed. Regulators should not intervene if not necessary, but they must prevent the transmission of crises between markets. This will likely bring trust to the developed countries' sovereign debt and the portfolios of the financial institutions, which hold most of this debt will be considered safe as well.
Social implications
The conclusions provide a safe counterweight in various respects. First, the negative effects and the need to rapidly cease or limit such policies. Second, the financial stability aimed by ECB. Such policies contain the possibility of a subsequent moral hazard related to Member State and bank behavior. However, these contingencies need to be assessed with the benefits resulting from the restoration of financial markets and the disconnection between banking and sovereign credit risk. This leads Eurozone's financial system to become less vulnerable to the sovereign credit risk and therefore more safe, helping to restore confidence in the real economy.
Originality/value
Contribution in terms of methodology and conclusions. It offers important conclusions regarding the limitations of yields and volatility of CDS spreads. It examines the spillover effects of the fiscal situation of Eurozone countries on banking institutions by extending the existing methodology and introducing new questions focusing on the reaction of CDS market to the ECB monetary policy, the reduction of risk premiums at sovereign and banking level and the gradual reduction of interdependence between them.
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Finn Marten Körner and Hans-Michael Trautwein
The purpose of this paper is to test the hypothesis that major credit rating agencies (CRAs) have been inconsistent in assessing the implications of monetary union membership for…
Abstract
Purpose
The purpose of this paper is to test the hypothesis that major credit rating agencies (CRAs) have been inconsistent in assessing the implications of monetary union membership for sovereign risks. It is frequently argued that CRAs have acted procyclically in their rating of sovereign debt in the European Monetary Union (EMU), underestimating sovereign risk in the early years and over-rating the lack of national monetary sovereignty since the onset of the Eurozone debt crisis. Yet, there is little direct evidence for this so far. While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union.
Design/methodology/approach
While CRAs are quite explicit about their risk assessments concerning public debt that is denominated in foreign currency, the same cannot be said about their treatment of sovereign debt issued in the currency of a monetary union. This paper examines the major CRAs’ methodologies for rating sovereign debt and test their sovereign credit ratings for a monetary union bonus in good times and a malus, akin to the “original sin” problem of emerging market countries, in bad times.
Findings
Using a newly compiled dataset of quarterly sovereign bond ratings from 1990 until 2012, the panel regression estimation results find strong evidence that EMU countries received a rating bonus on euro-denominated debt before the European debt crisis and a large penalty after 2010.
Practical implications
The crisis has brought to light that EMU countries’ euro-denominated debt may not be considered as local currency debt from a rating perspective after all.
Originality/value
In addition to quantifying the local currency bonus and malus, this paper shows the fundamental problem of rating sovereign debt of monetary union members and provide approaches to estimating it over time.
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Mario Gruppe, Tobias Basse, Meik Friedrich and Carsten Lange
This paper aims to briefly review the literature on interest rate convergence and the European debt crisis with a special focus on the current fiscal problems of some governments…
Abstract
Purpose
This paper aims to briefly review the literature on interest rate convergence and the European debt crisis with a special focus on the current fiscal problems of some governments in Europe.
Design/methodology/approach
Relevant empirical papers are identified and reviewed focusing on time series analysis techniques.
Findings
The introduction of the euro has caused interest rate convergence among European Monetary Union (EMU) government bond yields. However, now sovereign credit risk and possibly even redenomination risk have caused divergences in European bond markets.
Research limitations/implications
A major limitation is that a relatively new field of the literature is surveyed. However, there are enough papers of relevance. This review paper could therefore be helpful in finding new approaches for additional empirical research examining the EMU bond market.
Originality/value
The results of empirical studies in a relatively new field of the literature are summarized. There meanwhile are some relevant papers. A brief survey of the results of these papers is provided. Important empirical findings with regard to interest rate convergence, sovereign credit risk and redenomination risk in the EMU are discussed and evaluated. The review is especially helpful for researchers and practitioners in the field of managerial finance and risk managers in the financial services industry.
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Monica Singhania and Jugal Anchalia
Asian markets have shown immediate response to the financial crisis in the past and stock returns were affected critically. An attempt is made to study the volatility of stock…
Abstract
Purpose
Asian markets have shown immediate response to the financial crisis in the past and stock returns were affected critically. An attempt is made to study the volatility of stock returns in this paper. The authors studied the impact of global crisis on volatility of stock returns; that can help in better policy selection and implementation in the scenario of financial downturn. Looking at the increase in volume of trades between Asia and the world, Asian markets have gained prime position within global financial industry. Thus, it is essential that more researches are employed for better understanding of Asian Markets.
Design/methodology/approach
Impact on volatility of stock market returns of Hong Kong, Japan, China and India during sub-prime crisis and Eurozone debt crisis has been estimated using Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) model. The analysis is done using time series data of daily returns for the period 2005-2011 of the major indices of these countries (Hang Seng, Nikkei 225, Shanghai Composite and Nifty for Hong Kong, Japan, China and India, respectively). These series show non-normality, thick tails and high persistence in volatility and clustering and asymmetric properties.
Findings
It has been found that the sub-prime crisis had a positive impact on the volatility of returns of Japan, China and India while it had no impact on the volatility of returns of Hong Kong. In addition, it is interesting to see that the period of Eurozone debt crisis has had a negative impact on the volatility of already highly volatile stock returns of countries such as India and China. However, no impact on volatility of stock market returns in Japan and Hong Kong was observed of the Eurozone crisis. Also the authors noticed volatility clustering, persistence, asymmetry and leverage effects’ in stock returns series of Hong Kong, Japan, China and India.
Research limitations/implications
As far as limitations of the paper are concerned, the economy per say always has a cyclic tendency. This again has scope for distorting the final result and as again the reason given above the authors think that the effect will be minimized. As the paper is using specific statistical methods to verify the model and so the basic limitations of the statistical methods used will apply to the model also.
Practical implications
The results could be used in better understanding of the nature of sub-prime crisis and Eurozone debt crisis and how they impact different stock markets of Asia. Better policies during different scenarios of crisis could be employed by the countries. Furthermore, it can also prove useful in minimizing the impact on Asian markets from economic crisis in future.
Originality/value
The research is first to indicate the relationship between global crisis and sudden changes in variance of stock returns in Asian markets. The paper attempts to fill the gap of research in this area and also suggests the difference in nature of crisis and how they can affect certain countries. Further research could be done in studying suitable policy measures that can be implemented during different kinds of global crisis.
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Yasser Eliwa, Andros Gregoriou and Audrey Paterson
This paper aims to investigate the empirical relationship between the cost of debt (CoD) and accruals quality (AQ) of European listed firms during the period of 2005 to 2014…
Abstract
Purpose
This paper aims to investigate the empirical relationship between the cost of debt (CoD) and accruals quality (AQ) of European listed firms during the period of 2005 to 2014. Also, it aims to test the impact of the interrelationship between the financial crisis (2008-2009) and AQ on CoD. Finally, we decompose AQ into two components; the innate (InnateAQ) and discretionary components (DiscAQ); and test their relationships with CoD.
Design/methodology/approach
To empirically examine the relationship between AQ and CoD, a sample including 15 member states of the EU is constructed. AQ proxy is based on the McNichols (2002) modification of Dechow and Dichev (2002) model. A univariate analysis and a multivariate analysis are conducted to examine the relationship between AQ and CoD after controlling for firm characteristics and institutional variables.
Findings
We find a significant negative association between AQ and CoD in a vast proportion of the 15 countries under review. Also, the results indicate that during the crisis period, creditors pay relatively more attention to the quality of accounting information than during the pre-crisis period when they determine CoD of firms. Moreover, we report a link between the magnitude of this relationship and national characteristics and provide evidence of the significant effects of national characteristics and market forces on CoD. Finally, we find that InnateAQ drives the relationship with CoD.
Practical implications
This paper provides up-to-date evidence on the economic consequences of AQ and IFRS in the capital market. The results should, therefore, be of interest to managers, creditors, regulators and standard-setters.
Originality/value
To the best of the authors’ knowledge, this is the first paper to investigate the effects of AQ on CoD for European listed firms. Also, it examines the impact of financial crisis on the association between AQ and CoD.
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