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Are European bond markets overshooting?

Poglobljena analiza 15-05-2017

We find that monetary variables, spillovers from US financial markets, expectations and sovereign risks are the main determinants of long-term interest rates in the EA. The empirical model does not identify recent overshooting. The observed rise since August 2016 is attributed to two factors: a) the increase in US long-term interest rates after the reversal in the Fed’s monetary stance; b) political tensions in France, Italy or Spain which generated higher perceived political risk.

We find a wide range of effects from rising interest rates, mostly small and mostly negative, focused on investment spending, debt service costs and shrinking fiscal space. The recommendation for the ECB is not to react till the emerging European recovery is on a firmer basis. There is also the worry that rising/overshooting interest often reflect the fact that inflation risks are unequally distributed: larger in some places, but offset by their absence elsewhere. That is a matter for domestic policy ...

It has recently been established that Libor has been manipulated by Barclays Bank over a number of years. Improvements in the way Libor is calculated are being sought.

EU Public Debt Management and Eurobonds

Poglobljena analiza 09-09-2010

A common Eurobond making each participating issuer liable only for its own share could be agreed upon by the Member States with the lowest credit risk premia: Finland, France and Germany. However, the efficiency gains from this weak form of cooperation in terms of market integration and liquidity would be limited if not offset by the higher costs of an inflexible debt management. To reap the liquidity benefits of a unified market, the Eurobonds should be issued by all euro-area Member States or by ...