Pepino sovereign risk and financial crisis the international political economy of the eurozone (2015)

International Political Economy Series Series Editor: Timothy M Shaw, Visiting Professor, University of Massachusetts, Boston, USA, and Emeritus Professor, University of London, UK The global political economy is in flux as a series of cumulative crises impacts its organization and governance The IPE series has tracked its development in both analysis and structure over the last three decades It has always had a concentration on the global South Now the South increasingly challenges the North as the centre of development, also reflected in a growing number of submissions and publications on indebted Eurozone economies in Southern Europe An indispensable resource for scholars and researchers, the series examines a variety of capitalisms and connections by focusing on emerging economies, companies and sectors, debates and policies It informs diverse policy communities as the established trans-Atlantic North declines and “the rest”, especially the BRICS, rise Titles include: Ryan David 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Hanson, Cristina D’Alessandro and Francis Owusu (editors) MANAGING AFRICA’S NATURAL RESOURCES Capacities for Development Daniel Daianu, Carlo D’Adda, Giorgio Basevi and Rajeesh Kumar (editors) THE EUROZONE CRISIS AND THE FUTURE OF EUROPE The Political Economy of Further Integration and Governance Karen E Young THE POLITICAL ECONOMY OF ENERGY, FINANCE AND SECURITY IN THE UNITED ARAB EMIRATES Between the Majilis and the Market Monique Taylor THE CHINESE STATE, OIL AND ENERGY SECURITY Benedicte Bull, Fulvio Castellacci and Yuri Kasahara BUSINESS GROUPS AND TRANSNATIONAL CAPITALISM IN CENTRAL AMERICA Economic and Political Strategies Leila Simona Talani THE ARAB SPRING IN THE GLOBAL POLITICAL ECONOMY Andreas Nölke (editor) MULTINATIONAL CORPORATIONS FROM EMERGING MARKETS State Capitalism 3.0 Roshen Hendrickson PROMOTING U.S INVESTMENT IN SUB-SAHARAN AFRICA Bhumitra Chakma SOUTH ASIA IN TRANSITION Democracy, Political Economy and Security Greig Charnock, Thomas Purcell and Ramon Ribera-Fumaz THE LIMITS TO CAPITAL IN SPAIN Crisis and Revolt in the European South Felipe Amin Filomeno MONSANTO AND INTELLECTUAL PROPERTY IN SOUTH AMERICA Eirikur Bergmann ICELAND AND THE INTERNATIONAL FINANCIAL CRISIS Boom, Bust and Recovery Silvia Pepino SOVEREIGN RISK AND FINANCIAL CRISIS The International Political Economy of the Eurozone International Political Economy Series Series Standing Order ISBN 978–0–333–71708–0 hardcover Series Standing Order ISBN 978–0–333–71110–1 paperback (outside North America only) y You can receive future titles in this series as they are published by placing a standing order Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and one of the ISBNs quoted above Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England Sovereign Risk and Financial Crisis The International Political Economy of the Eurozone Silvia Pepino Bank of England, UK © Silvia Pepino 2015 Softcover reprint of the hardcover 1st edition 2015 978-1-137-51163-8 The book was written while the author was at LSE Any views expressed are solely those of the author and so cannot be taken to represent those of the Bank of England All rights reserved No reproduction, copy or transmission of this publication may be made without written permission No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages The author has asserted her right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988 First published 2015 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010 Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978-1-349-57304-2 ISBN 978-1-137-51164-5 (eBook) DOI 10.1057/9781137511645 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Pepino, Silvia, 1976– Sovereign risk and financial crisis : the international political economy of the eurozone / Silvia Pepino pages cm — (International Political Economy Series) Debts, Public—European Union countries Financial crises— European Union countries Eurozone European Union countries—Economic policy I Title HJ8615.P46 2015 2015013451 336.3 4094—dc23 Contents List of Tables and Figures vii Preface viii Sovereign Risk, Politics and the Eurozone Crisis 1.1 Introduction 1.2 Sovereign risk, developed democracies and financial crisis 1.3 Sovereign risk and the debt crisis in the Eurozone 1.4 The focus of the book 1.5 The approach in the book 1.6 Outline of the book 1 12 18 22 25 An IPE Framework for Sovereign Risk 2.1 Introduction 2.2 Adaptive markets and sovereign risk models 2.3 The political sources of sovereign credibility in financial markets 2.4 International influences on sovereign risk perceptions 2.5 Theoretical pillars 27 27 28 Bond Spreads, EMU Design and the Run-up to the Crisis 3.1 Introduction 3.2 Government bond spreads and EMU design 3.3 Greece and Ireland: The macro and political economy 3.4 Politics and spreads before 2008 53 53 54 60 66 The Greek Sovereign Debt Crisis 4.1 Introduction 4.2 Evolving investment analysis and the Greek sovereign debt crisis 4.3 Domestic political economy of the Greek sovereign debt crisis 4.4 International political economy of the Greek sovereign debt crisis 4.5 Key results from the Greek case study 73 73 The Irish Sovereign Debt Crisis 5.1 Introduction 5.2 Evolving investment analysis and the Irish sovereign debt crisis 96 96 v 34 44 51 75 81 86 94 99 vi Contents 5.3 Domestic political economy of the Irish sovereign debt crisis 5.4 International political economy of the Irish sovereign debt crisis 5.5 Key results from the Irish case study 106 111 119 The International Political Economy of the Eurozone Sovereign Debt Crisis 6.1 Introduction 6.2 Lessons from the Greek and Irish crises 6.3 Application to other Eurozone sovereigns 6.4 Next steps in IPE research 6.5 Implications for policy 6.6 Final remarks 121 121 122 127 133 135 139 Notes 141 Bibliography 156 Index 170 Tables and Figures Tables 3.1 Greece and Ireland macro-data snapshot 3.2 Comparing political economy variables in Greece and Ireland 6.1 Key economic and financial indicators 61 65 128 Figures 1.1 Ten-year government bond yields in selected developed democracies 2.1 Veto players in emerging markets and developed democracies 2.2 Formal checks and balances, socio-political contestation and credibility outcomes 2.3 Domestic and international political economy trade-offs in the sovereign default decision 3.1 Greece and Ireland government bond spreads to Germany 3.2 Eurozone government bond spreads to German benchmark 3.3 S-score for Greece and Ireland 3.4 Greece government bond spreads and key events 3.5 Ireland government bond spreads and key events 4.1 Greece ten-year government bond spread to Germany and key events 4.2 Greece bond spread and macro-fundamentals 5.1 Ireland ten-year government bond spread to Germany and key events 5.2 Ireland bond spread and macro-fundamentals 6.1 Ten-year government bond spreads to Germany: Portugal, Ireland, Greece 6.2 Ten-year government bond spreads to Germany: Italy and Spain 6.3 Ten-year government bond yields across the Eurozone vii 40 42 49 56 57 64 67 71 76 78 98 101 128 131 134 Preface When the theme of Sovereign Risk and Financial Crisis was being defined, it was far from obvious that the issue of Euro-area sovereign risk would become as prominent as it has in the last few years Meanwhile, a severe financial crisis hit the US and Europe, and governments emerged as the only remaining lifeline for failing banks and a collapsing real economy Since then, a number of Euro-area governments have come into the firing line, burdened by bank rescues, automatic stabilisers and countercyclical fiscal policy, and one of the main events in the financial history of the last few decades has unfolded For decades, scholars, investors and policymakers treated sovereign default risk as a defining feature of emerging market economies Recently, sovereign risk has re-emerged as an empirical issue for advanced economies, raising new questions for academic research, policymaking and popular debate The key tenet of this book is that domestic and international political factors influence sovereign credibility in financial markets in developed democracies as well as in emerging markets, and the analysis reveals which political economy factors matter most for investment decisions The unfolding of the Eurozone debt crisis at the time of writing provided a valuable real-life test of the theoretical arguments Indeed, the book combines an innovative international political economy framework with the results of in-depth analysis of government bond market fluctuations during the crisis A strong link emerges between political economy factors and financial market perceptions of sovereign risk The result is an original theoretical and empirical approach to open the debate on the political determinants of sovereign risk premia in developed democracies The constantly evolving nature of the debt crisis added a number of challenges to the project, but the resulting efforts added to its timeliness and interest for the academic and policy community Crucially, its conclusions sound like a cautionary tale for the current historical phase, alerting policymakers as to the importance of carefully managing the political economy aspects of the painful macroeconomic adjustments that many European countries are now going through viii Sovereign Risk, Politics and the Eurozone Crisis 1.1 Introduction For a number of decades, sovereign risk was considered by most a defining feature of emerging markets While emerging market economies experienced repeated cycles of booming capital inflows followed by financial crisis, the environment appeared much calmer in advanced economies, with no default reported in the post-war period Reflecting this, the direct academic study of sovereign risk was mostly concentrated on the emerging world However, things have changed dramatically in the last few years In the aftermath of the global financial crisis, advanced economies saw a sharp rise in their actual and contingent liabilities, making medium-term public debt sustainability increasingly challenging As a result, a number of developed democracies lost their status as “risk-free” borrowers in financial markets: some saw a significant increase in their financing costs in global markets, while a few lost access outright to international finance The Eurozone sovereign debt crisis represents most dramatically the increased difficulties of developed democracies in global financial markets The deterioration in public finances and growth prospects was common to a number of developed economies, including the US, the UK and Japan, as well as most Eurozone economies However, financial markets punished Eurozone sovereigns, and particularly the weaker economies in the Eurozone,1 more severely than stand-alone developed democracies.2 The particular nature of Eurozone sovereign debt, as argued by De Grauwe (2012), likely contributed to accelerating market concerns about sovereign creditworthiness At the time of writing, it is too early to tell whether the remaining developed-world sovereigns will remain immune to market reversals in the coming years Against this uncertain backdrop, the re-emergence of sovereign risk as an empirical issue for a new group of countries is bound also to ignite interest in academia in studying its features This book places itself in the historical and empirical context described above It aims to contribute to understanding how international financial 162 Bibliography European Union Finance Ministers (2010) Statement of European Union finance ministers May 9–10, 2010 Eurostat (2004) Report by Eurostat on 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Briefing Notes to the Committee for Economic and Monetary Affairs of the European Parliament, Second Quarter, for discussion at the Meeting with Monetary Experts, May 11, 2005 Index Note: The letters ‘f’ ‘n’ & ‘t’ following locators refer to figures, notes, and tables respectively Adaptive Market Hypothesis (AMH), 30–1, 33 adaptive markets, 28–32 simple heuristics, 28 survival of the richest, 28–30 evolutionary biology, 28 innovation, 29 varying degrees of efficiency, 29 asset prices, 32, 55 Asian financial crisis, 4, 32, 39 Australia, healthy public finances, bail-out negotiations, 47, 125 Bank for International Settlements, 141n8 Bayesian updating process, 143n2 benchmark bonds, 54 bond-market liquidity, 25 bond valuation, 58, 123 bond-yield curve, 55 boom–bust cycles, 62, 97, 139 bounded rationality framework, 31 Britain (United Kingdom) backdrop to public borrowing, 37 bilateral contributions, 13 bond yields decline, 57 creditworthy, 30 high debt, 139 increase in public debt, Canada, bond yields decline, 57 capital mobility, 136 Celtic Tiger, see Ireland checks and balances, 4, 35–8, 42, 65, 68–9, 71, 82–3, 85, 88, 90, 97, 106, 109, 111, 125, 128–9, 141n4 CHECKS measurement, 65, 143n7 China, sovereign wealth funds, 135 Christian Democratic Union (CDU), 88 Christian Social Union (CSU), 88 Collateralised Debt Obligations (CDOs), 80 contingency support mechanism, 89 credibility, see sovereign credibility; financial market credibility credit default swap (CDS), 12, 142n13, 144n4 Credit Institutions Financial Support Scheme, 150n2 (credit) rating, 8–10, 15, 77, 79 credit rating downgrade, 55, 148n9 credit risk, 9–10, 17–19, 23, 30, 54–5, 96–7, 102, 115, 124, 133 currency risk, 17 credit-scoring, 146n19 creditworthiness, see sovereign creditworthiness crisis sovereign debt crisis, 1–3, 5, 7, 11–4, 17–19, 21–5, 29, 33–5, 43, 51–3, 56, 58, 60–4, 66–7, 69–5, 81–3, 85–6, 90, 92, 94, 97, 99, 105–7, 110, 111, 115–16, 118–19, 121–2, 124–7, 129–4, 138 financial crisis, 1, 4–12, 15, 29, 32–3, 56, 58, 62, 64, 68–70, 78, 80, 93, 96–7, 99–100, 103, 113, 123, 130, 134, 136, 137 banking crisis, 11, 31, 53, 62, 64, 70, 96–7, 99–100, 102, 114, 119, 123–4, 144n cross-border bond ownership, 27, 35, 44, 46 currency-risk premium, 144n6 Database of Political Institutions (DPI), 40 debt monetisation, 8, 22–3, 142n20 default, see sovereign default Denmark, bilateral contributions, 13 170 Index developed democracies and credit risk, debt monetisation, doubts about absolute credibility, foreign-held debt, incidence of sovereign defaults, risk-free government debt, risk-free interest rate, risk-free status, stand-alone, 1, 15, 22–3 ten-year government bond yields, 7f treasury yields, veto players in, 40f Dubai World credit, 80, 94 Economic and Monetary Union (EMU), 5, 12–17, 21–4, 46–8, 53–71, 73–96, 102–5, 112, 114–19, 125–7, 134–5, 138–9, 142n18, 142n21, 144n5, 145n9, 146n13, 147n24, 148n8, 149n14, 150n38, 152n32, 153n37, 155n13 emergency lending assistance (ELA), 113 emerging markets, 1–4, 6, 9, 11, 15, 18–19, 24, 27, 28–30, 33–4, 39–41, 45, 51, 121, 123–4, 126, 141n2, 142n22, 144n8 essential nature of sovereign risk, 19 European Commission, 13, 59, 62, 69, 84, 99–100, 103, 129, 132, 137, 149n15 European Council, 14–15, 68, 81, 84–5, 87, 89–90, 93, 105 European Central Bank (ECB), 13, 15–17, 78–9, 81, 84–5, 87, 90, 100, 108, 111–15, 117–20, 124–5, 129–30, 132, 135, 137, 142n14, 148n10, 152n20, 152n27–30, 152–3n33, 153n36–39, 154n47 European Constitution, ratification of, 69 European Financial Stability Facility (EFSF), 13–14, 17, 73, 86, 87, 96–7, 105, 112–19, 127, 130, 135, 138–9 European Financial Stability Mechanism (EFSM), 13 European Monetary System (EMS), 32 European Stability Mechanism (ESM), 14 171 Eurozone sovereign debt crisis, 1–3, 5, 11–15, 21–2, 24, 121–2, 127, 130 elevated debt and deficits, 12 exchange rate risk, 17 incentives for cross-country bail-outs, 16 (no) burden-sharing, 17 peripheral economies, 14 real-estate crisis, 14 reversibility of euro, 17 stages of, 13 evolving sovereign risk analysis, 32–4 ex-post veto power of the Constitutional Court, 88 external bail-out, 4, 11, 20, 29, 46–7, 49–53, 92, 94–5, 110, 125 external vulnerability indicators, 63 Fianna Fail, 71, 107–10 approval ratings, 108 support plummeting, 108 financial market credibility, 3, 91, 111, 135, 140 Fine Gael, 107, 109–10 fiscal consolidation, 4, 20, 38, 86, 95, 100–9, 111, 117 fiscal dominance, of monetary policy, 23 fiscal tightening, 8, 14, 53, 83, 100, 104, 110, 116 Fitch Ratings, 77, 79 foreign-currency-denominated sovereign debt, 15 France and AAA credit ratings, debt securities, 25 Franco-German Deauville agreement, 105 and Greece, 117 high debt, 139 and public borrowing, 37 Standard and Poor’s scale, 16 Germany austerity drive, 117 benchmark rate, 70 checks and balances, 90 CHECKS score, 88 debt securities, 25 dot-com bust, 68 economic performance of, 69 172 Index Germany – continued and Eurozone government bond, 57f government bond yield, 55, 145n7 and Greek rescue decisions, 87 reverberation effects, 77 Standard and Poor’s scale, 16 ten-year bonds, 12 Glorious Revolution of 1688, 36 good credits, 3, 28, 33 government bonds, 54–60 bond-yield moderation, 58 budget deficit reduction, 57 credit default swaps (CDS), 54 credit rating downgrade, 55 currency devaluation, 55 current account imbalances, 57 domestic-denominated bonds, 55 German bond yield, 55 Greek ten-year bond, 55 inflation, 57 interest rate inertia puzzle, 60 Maastricht Treaty, 56–8 macroeconomic differences, 56 market-disciplining hypothesis, 58–60 risk-free rate, 54 structural differences, 56 Greece bail-out of, 13 bond spread to Germany, 68, 76f, f 77, 78f, f 86; behaviour of, 74 bond yields increase, 53 budget deficit, 68–9, 93 checks and balances, 65, 82, 85 CHECKS score, 65 credit risk premium, 94, 123 creditworthiness, 94 current account deficit, 61 debt burden, 53 debt restructuring, 14 debt securities, 25 deficit reduction programme, 84 domestic political economy, 81–6 downgrades rating, economic performance of, 69 explanatory variables, 24 external aid request, 58 external bail-out, 53 external imbalances, 60 financial markets disenchantment, 75 financial support from Germany, 47 fiscal tightening, 83 Fitch’s rating, 77, 79 and foreign direct investment, 66 general strikes, 66, 85 good credit to bad credit, 73 government bond, 11, 56f higher domestic debt, 60 International political economy, 86–94; fiscal austerity, 90; German approval of loan package, 89; German voter opposition to the Greek rescue, 88; impact on bond markets, 88; market confidence rebuilding, 90; market doubts, 89; political economy trade-offs, 87; rescue package, 92; structural reform, 90 investment analysis, 75–81 issue-linkages, 91 macro- and fiscal fundamentals, 75 macro and political economy, 60–6 macro-data snapshot, 61t macro-fundamentals, 60–3, 78f parliamentary system, 82 pension system reforms, 85 polarised ideological system, 94 political economy backdrop, 26, 64–6 programme of adjustment, 80 proximity role of, 91 public finances mismanagement, 11 risk premia, 29, 75, 80, 87, 92 sovereign debt crises, 22, 24, 26, 54, 121, 123, 140 sovereign liabilities, 14 S-score, 63–4, 68, 75 Standard and Poor’s rating, 77, 79 structural reform, 82–3, 86 ten-year bond, 12, 55 ten-year yields, 89–90 tougher budget cuts, 82 uptrend in borrowing costs, 12 veto player(s), 22, 24, 65, 85, 87, 90, 94, 97, 109, 111, 114, 119–20, 124–5 Green Party, 107–8 gullibility of traders, 32 Index IMF–Egypt agreements, 48 Indignados movement, 155n8 inflationary default, 10 international bail-out, 27 International Monetary Fund (IMF), 4, 6, 11, 13–14, 44, 46–8, 53, 58, 73, 81, 83–5, 87, 89–90, 96, 100, 105, 107, 112, 114, 117–19, 126–7, 135 international political economy anchoring effects, 124 credibility-shattering discovery, 123 credit risk transfer, 124 domestic socio-political system, 121 economic, financial and political drivers, 122 EMU institutional setting, 135 external imbalances, 123 financial variations, 122 fiscal adjustments, 126 framework, 22–3, 34 and investment analysis, 121 macro-economic variations, 122 market constraints, 123 policy monitoring, 137 political-economy proximity, 130 proximity degree, 122 and public growth, 123 quasi-perfect bipolarism, 130 rationalist institutionalism, 135 real-estate crisis, 130 regional–nationalist identities, 131 safe-haven effect, 133 social unrest, 131 socio-political cohesion, 128 socio-political polarisation, 129 sovereign borrowers vs international financial markets, 136 structural adjustments, 126 surveillance, 137 ten-year government bond, 22 veto-player, 22, 122, 124–5, 132 international risk aversion, 18, 67, 72, 146n14 investment analysis, 2, 22, 75, 99, 121 investor behaviour, 3, 30, 32–4 Ireland bank bail-outs and guarantees, 96 banking crisis, 62, 71 bond spread, 101f bond yield, 102, 104 173 boom–bust cycle, 62, 97 cash reserves, 118 as Celtic Tiger, 62, 123 checks and balances, 65–6, 71 CHECKS score, 66 cohesive social context, 71 creditors proximity, 118 credit risk transfer hypothesis, 97 creditworthiness, 114, 119 crisis resolution mechanism, 104 debt securities, 25 direct investments, 115 domestic debt, 60 domestic political economy, 106–11 EU/IMF rescue package, 112 explanatory variables, 24 exports, 115 external aid request, 58 external imbalances, 60 fiscal management track record, 100 foreign direct investment, 62 general strike, 66 good credit to bad credit, 96 government bond, 11, 56f ; spreads, 71f interest rate convergence, 70 international political economy, 111–19 investment analysis, 99–105; banks CDS prices, 102; credit risk transfer mechanism, 102; darling of bond markets, 100; exports and a credit boom, 99; Gross national product (GNP), 99; projected cost of bank bail-outs, 103; senior bank creditors, 99; S-score, 101 and foreign direct investment, 66 Irish–German bond spreads, 103 June 2008 referendum, 71 large-n analysis, 97 liberal corporatism, 110 macro and political economy, 60–6 macro-data snapshot, 61t macro-fundamentals, 60–3, 101f National Pension Reserve Fund, 13, 118 per capita GDP of, 62 policy measures of, 103 political economy analysis, 64–6 174 Index Ireland – continued political economy backdrop, 26, 65 private sector debt, 63 recession and unemployment, 110 risk premia, 29 social and political landscape, 66, 109, 119, 125 social pact of 1987, 110 sovereign debt crises, 22, 24, 26, 53, 54, 121, 123, 140 S-score, 63–4, 70 and ten-year government bond, 98f and US multinationals hubs, 66, 115 veto-player(s), 65, 97, 106–7, 109, 111, 119–20, 124–5 Irish National Recovery Plan, 154n48 issue-linkages approach, Italy bond markets of, 58 debt securities, 25 external bail-out, 130 government bond, 14 ideological alignment with EU rules, 47 risk premia, 29 Japan, 1, 6, 134, 139, 141n9 Keynesianism, 29 liquidity and overall risk aversion, 142n11 liquidity premium, 146n12 Lisbon Treaty, 14, 71 long-term re-financing operations (LTROs), 15 Luxembourg, Standard and Poor’s scale, 16 Maastricht limit, 61, 77 Maastricht Treaty, 13, 21, 29, 56–7, 59, 80, 87, 89, 93, 114 market-disciplining hypothesis, 58–9 monetary union, nature of, 13, 18 National Asset Management Agency (NAMA), 99 Netherlands, 16, 115, 117, 133 New Democracy (Conservative), 83 New Democratia (ND), 69 New Zealand, bond yields decline, 57 no-bail-out, 87, 138, 145n11 see also Maastricht Treaty Norway, healthy public finances, opinion polls (presidential elections), Organisation of Economic Co-operation and Development (OECD), 10 outright monetary transactions (OMTs), 15 Pan-Hellenic Socialist Movement, 149n18 PASOK (Social Democratic), 69, 75, 82–3 PIGS group of countries, 146n16 politics, see international political economy political aspects, of sovereign risk, 20–2 debt default, 20 distributional implications, 20 domestic and international, 20 external bail-out, 20 fiscal consolidation, 20 political trade-offs, 20 political economy, see international political economy political economy approach, 18–20 political economy factors, 2, 22, 94, 121 political system, see socio-political system political trade-offs, 3, 20, 34–5, 49 Portugal downgrades in debt, risk premia, 29 Standard and Poor’s scale, 16 pro- or anti-Anglo-Irish Treaty, 109 public budget deficit, 57, 67–8 public debt sustainability, 148n4 Public Sector Purchase Programme (PSPP), 142n14 quantitative easing, 141n7, 142n14 quasi-federal system, 131 rainbow coalition, 107 rating agencies, 9–10, 16, 77, 81, 100, 103, 142n17 rescue packages, 13–14, 53, 87–8, 92, 94, 107–8, 112–13, 115, 118–19, 123, 127, 148n3, 151n13 Index re-emergence, of sovereign risk, 1, 18 repo power, 154n2 risk, see sovereign risk; credit risk; currency risk risk-free borrowers, risk-free interest rate, 8, 33 risk perceptions, 2, 10, 18–9, 21–2, 28, 31, 35, 50–2, 54, 102, 121 risk premia, 16–17, 23, 25–7, 29, 35, 39, 44, 48, 50, 55, 58–9, 70, 75, 77, 80, 82–3, 87, 90, 92, 94, 96, 102, 104, 107, 119, 125, 128, 130, 137, 144n5, 145n7 Royal Bank of Scotland (RBS), 117 Securities Market Programme (SMP), 15, 113–15 small-n approach, 23–4 social unrest, 83, 111, 129, 131–2, 150n33 socio-political cohesion, 111, 128, 132, 140 socio-political polarisation, 35, 41–2, 66, 84, 97, 109, 129 socio-political system (domestic), 2, 4, 25, 41, 94, 119, 129, 135, 121 sovereign borrower, 10, 18 sovereign crisis, see crisis sovereign credibility, 2–4, 22, 25, 34–5, 37–9, 41, 43, 48, 52, 65, 74, 94, 97, 109, 118–19, 122–6, 132 checks and balances, 35–7, 42f contestation and polarisation, 35 fiscal adjustment, 39, 42 and government policies, 36 implementation risk, 42 international debt repayment incentives, 36 partisan interaction, 37 political sources, 34–44 political trade-offs, 35 social polarisation, 42 socio-political contestation role, 41–3 structural adjustment, 42 testable hypotheses, 43–4 veto players, 37–8 war of attrition model, 39 sovereign creditworthiness, 1–3, 19, 21, 35, 41, 49, 79–80, 102, 119, 122, 124 175 sovereign debt crisis, 11–2 feature of, 19 pricing, 19 repayment, 4, 37, 45 sovereign debt crisis, see crisis sovereign rescue operation, 13 sovereign risk defining, 9–10 and developed democracies, 7–9 evolution analysis, 32–4 see political aspects of, sovereign risk sovereign risk perceptions, 2, 4, 18–23, 25, 28, 34–5 international influences, 44–51 cross-issue bargaining, 46 domestic constituents, 45 domestic political economy trade-offs, 49f external bail-out, 46–9 external creditors, 46 external debt repayment, 44 external interests, 44 global integration of financial markets, 45 indirect or second-round, 45–6 international interests, 46–9 international political economy trade-offs, 49f IPE factors, 49–50 issue linkages, 45–6 measures of, 54–56 political proximity, 48 sovereign borrower attitude, 44–6 testable hypotheses, 50–1 sovereign default, 7–11, 19–21, 27, 30, 44–9, 54, 58, 91, 92, 138, 142n23, 150n43, 155n12 Spain, 7, 14, 29, 74, 112, 127, 129–33, 135 and bond markets, 58 external bail-out, 130 government bond, 14 rescue package, 14 risk premia, 29 S-score, 63–4, 68, 70, 75, 77, 100–1, 148n5, 151n4 Stability and Growth Pact (SGP), 16–17, 59, 77, 137, 149n13, 155n13 176 Index Standard and Poor’s, 8–10, 16, 77–9, 103, 141n10 state–market relations, 5–9 balance of power, and real-estate crisis, and financial markets, re-balancing of power, unemployment, structural reforms, 68, 82, 84, 86, 136 submerging markets, 33 Sweden bilateral contributions, 13 bond-yield convergence, 57 public finances, Switzerland, healthy public finances, Teachta Dala (TDs), 106 ten-year government bond, 67–8, 128f, f 131f, f 134ff, 151n13 Too Much, Too Late Hypothesis, 32–3 trade inter-linkages, 27 troika, 82, 149n15 two-level political decision, 142n21 United States and AAA credit ratings, and bond yields, 57 creditworthy, 30 high debt, 139 and public debt, Standard and Poor’s rating, treasury yields, 11, 33 valuation error, 33 valuation models, 3, 30–3, 94, 102, 123–4, 136, 143n3 veto players, 4, 36–41, 43, 47–8, 50–1, 65, 83, 87, 90, 94, 120, 122, 125, 135 configuration possibilities, 40 constitutional, 37–8 cross-country databases, 38 in developed democracies, 40f external preferences, 50 factual, 41 formal, 4, 24, 41–4, 52, 65, 85, 111, 124, 141n4 House of Representatives, 38 influence of constellation, 52 institutional, 4, 38, 41, 83, 106, 141n4 mid-range configurations, 40 partisan, 38 polarisation degree, 38 president, 38 role of, 3, 51 Senate, 38 bail-out decision, 47, 113 yield to maturity, 54 ... ICELAND AND THE INTERNATIONAL FINANCIAL CRISIS Boom, Bust and Recovery Silvia Pepino SOVEREIGN RISK AND FINANCIAL CRISIS The International Political Economy of the Eurozone International Political. .. Basevi and Rajeesh Kumar (editors) THE EUROZONE CRISIS AND THE FUTURE OF EUROPE The Political Economy of Further Integration and Governance Karen E Young THE POLITICAL ECONOMY OF ENERGY, FINANCE AND. .. viii Sovereign Risk, Politics and the Eurozone Crisis 1.1 Introduction 1.2 Sovereign risk, developed democracies and financial crisis 1.3 Sovereign risk and the debt crisis in the Eurozone 1.4 The