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Fiscal austerity, growth prospects, and sovereign CDS spreads: The Eurozone and beyond

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  • Chunming Yuan
  • Tanu J. Pongsiri

Abstract

This paper applies both conventional panel data models and a dynamic simultaneous equations model to analyze the impact of fiscal austerity and growth prospects along with other macro fundamentals on the pricing of sovereign credit default swaps (CDS) for a panel of 36 countries including the Eurozone. We find that austerity practice generally leads to an expectation of improved fiscal situations, which tends to help the CDS market grow more confidence in indebted sovereigns? ability to service their debt. The public debt to GDP ratio and projected future output growth also play an important role in determining the prices of sovereign debt insurance. Our analyses further show that the behavior of CDS spreads is considerably affected by common time trends over the sample period.

Suggested Citation

  • Chunming Yuan & Tanu J. Pongsiri, 2015. "Fiscal austerity, growth prospects, and sovereign CDS spreads: The Eurozone and beyond," International Economics, CEPII research center, issue 141, pages 50-79.
    • Handle: RePEc:cii:cepiie:2015-q1-141-4
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    Citations

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    Cited by:

    1. Mikhail Stolbov, 2017. "Determinants of sovereign credit risk: the case of Russia," Post-Communist Economies, Taylor & Francis Journals, vol. 29(1), pages 51-70, January.
    2. Piotr Ciżkowicz & Grzegorz Parosa & Andrzej Rzońca, 2022. "Fiscal tensions and risk premium," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(3), pages 833-896, August.
    3. Gül Huyugüzel Kışla & Y. Gülnur Muradoğlu & A. Özlem Önder, 2022. "Spillovers from one country’s sovereign debt to CDS (credit default swap) spreads of others during the European crisis: a spatial approach," Journal of Asset Management, Palgrave Macmillan, vol. 23(4), pages 277-296, July.

    More about this item

    Keywords

    Credit default swap; Fiscal austerity; Growth prospects; Dynamic simultaneous equations model;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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