Work detail

Do markets believe in austerity? Did they ever believe?

Author: Josef Švéda
Year: 2020 - summer
Leaders: PhDr. Jaromír Baxa Ph.D.
Consultants:
Work type: Economic Theory
Masters
Language: English
Pages: 79
Awards and prizes:
Link:
Abstract: We assess the effects of austerity announcements on investors’ perception of the government’s
solvency across the financial cycle. To do so, we construct a unique news dataset utilizing a
newswire database which consists of governmental and parliamentary approvals of austerity
measures for 11 European countries. We also follow more regular statements of governmental
representatives towards austerity measures. The effects are studied on 10-year sovereign bond yield
spreads vis-à-vis Germany during the period 01:2000-12:2019. Implementing pooled OLS
regressions, we find significant decreasing effects in the pre-crisis period especially for the GIIPSH
group (Greece, Ireland, Italy, Portugal, Spain, and Hungary) and decreasing although not
significant effects in the post-crisis period. The crisis period manifests itself with increased surprise
effects of announcements. The markets adopted announcements of the GIIPSH group as signals of
deteriorating solvency which led to further increases of yield spreads. On the other hand, prudent
countries (Czechia, France, Netherlands, Poland, and Slovakia) enjoyed a low sensitivity to their
announcements across the cycle. Finally, we find that markets react rather on final announcements
of austerity measures than to comments expressed by national representatives

Partners

Deloitte

Sponsors

CRIF
McKinsey
Patria Finance