Abstract
We study the sovereign yield spreads determinants in transition – Central and Eastern Europe (CEE) and Caucasus and Central Asia (CCA) -- countries and try to provide an answer to the key question: was the narrowing of the spreads and their compression a result of improvement of CEECCA countries sovereign’s macroeconomic policy (implemented in early to mid 2000s), or was it due to global excess liquidity provision? If better domestic macroeconomic policy efforts and solid reforms implemented in this period have led to: i) improvement in sovereign debt management e.g., by increasing the average debt portfolio duration and reducing the stock of FOREX debt; ii) development of domestic financial markets with enlargement of the investor’s base and enhancement of the risk management techniques; iii) continuing financial liberalization; iv) sustainable fiscal adjustment, reserve accumulation and price stability; and v) adoption of the most conductive to prosperity institutional structure, then it would be expected that any tighter monetary policy environment in the developed economies should have only a tiny effect on spreads.The models are estimated on an individual basis -- country by country -- using a framework allowing for fractionally integrated variables (ARDL) as well as, by utilising panel data (cross-sectional-time-series) estimation whenever data availability allows.We utilise daily data over the period 2006-2012 and quarterly data over the period 2002-2011. These are the periods for which meaningful comparable data are available for Bulgaria, Croatia, Hungary, Kazakhstan, Poland, Russia, Serbia, and Ukraine (in various combinations).We are careful not to attempt to split the sample into (say two) potential segments for comparison of “normal” versus “crises” period estimates (as customary) as since 2002 / 2003 the transition economies have started to experience the powerful financial effect generated by the excess global liquidity, i.e., the entire period under consideration is constituted by two phases characterised by: i) excess liquidity (2002-2008); and, ii) the Great Depression Mark II (2008 – to present).
Highlights
We utilise daily data over the period 2006-2012 and quarterly data over the period 2002-2011
We are careful not to attempt to split the sample into potential segments for comparison of “normal” versus “crises” period estimates as since 2002 / 2003 the transition economies have started to experience the powerful financial effect generated by the excess global liquidity, i.e., the entire period under consideration is constituted by two phases characterised by: i) excess liquidity (2002-2008); and, ii) the Great Depression Mark II (2008 – to present)
While there have been a number of papers dealing with yield spreads on Eurozone government bonds (e.g., Codogno, Favero and Missale (2003), Pagano and Von Thadden (2004), Mody (2009), and Klepsch and Wollmershauser, (2011)) there have not been many methodical studies on the price determination of sovereign bonds in emerging markets; in the group of Central and Eastern Europe (CEE) and Caucasus and Central Asia (CCA) countries
Summary
“Half-knowledge is more victorious than whole knowledge: it understands things as being more simple than they are and this renders its opinions more intelligible and more convincing.”. One early (partial exception) is the paper of Eichengreen and Mody (1998) examining launch spreads based on data for a mixed group of 55 emerging market countries over the period 1991 to 1996 They collect information on altogether 1,033 bonds split as follows: 670 from Latin America; 233 from East Asia; and 81 from Eastern Europe. It is interesting to compare the coefficients of regression on the variables Debt/GNP and GDP growth between the combined group of Latin America and East Asia countries with the Eastern Europe bond issues While for the former group the coefficient on Debt/GNP is relatively small, has positive sign (0.437) and is significant (t-stat 2.054), for Eastern Europe its value is big, negative (-1.255) and it is insignificant (t-stat -1.367). Our research paper aims to help to reveal definite empirical regularities, plausible interconnections, and credible causalities in this area, providing an answer to the question -- was the general narrowing of the spreads and their compression a result of an improvement of CEECCA countries macroeconomic policy, implemented after 2002, or was it due to global excess liquidity provision
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