ECB Interventions in Distressed Sovereign Debt Markets: The Case of Greek Bonds
- 99 Downloads
We study central bank interventions in times of severe distress (mid-2010), using a unique bond-level dataset of ECB purchases of Greek sovereign debt. ECB bond buying had a large impact on the price of short and medium maturity bonds, resulting in a remarkable “twist” of the Greek yield curve. However, the effects were limited to those sovereign bonds actually bought. We find little evidence for positive effects on market quality, or spill-overs to close substitute bonds, CDS markets, or corporate bonds. Hence, our findings attest to the power of central bank intervention in times of crisis, but also suggest that in highly distressed situations, this power may not extend beyond those assets actually purchased.
JEL ClassificationE430 E580 F340 G120
We are grateful to Bennet Berger, Alvaro Leandro, Adrian Rott and Maximilian Rupps for excellent research assistance, Christine Sheeka for helpful information on the MTS high-frequency data, Jonathan Lehne, Olga Ponomarenko, and Kristjan Piilmann for assisting us with the collection of Bloomberg data and Egor Gornostay for his careful fact-checking. We also thank the Editor, several anonymous referees, Henrique Basso, Benjamin Böninghausen, Giovanni Dell’Ariccia, Marcel Fratzscher, Thomas King, Sergi Lanau, Athanasios Orphanides, Seth Pruitt, Julian Schumacher, Bernd Schwaab, Andrei Shleifer, Linda Tesar, Julian Williams, and seminar participants at the ECB, the Federal Reserve Bank of Chicago, the Federal Reserve Bank of San Francisco, the Bank of Spain, the LSE Financial Markets Group, ZEW Mannheim, and the Universities of Frankfurt (Goethe), Mainz, Munich, and Santa Clara for helpful comments and suggestions.
- Aguiar, Mark, and Manuel Amador. 2013. Take the Short Route: How to Repay and Restructure Sovereign Debt with Multiple Maturities. NBER Working Paper 19717.Google Scholar
- Andritzky, Jochen, Julian Schumacher, and Christoph Trebesch. 2014. Total Returns in Distressed Sovereign Bond Markets. Unpublished draft. International Monetary Fund.Google Scholar
- Barclays. 2012. ECB SMP: Marking to Market. Interest Rates Research Report. 6 January 2012.Google Scholar
- Bauer, Michael, and Glenn Rudebusch. 2013. The Signalling Channel for Federal Reserve Bond Purchases. Working Paper 2011-21. Federal Reserve Bank of San Francisco.Google Scholar
- Beetsma, Roel, Frank de Jong, Massimo Giuliodori, Daniel Widijanto. 2014. The impact of news and the SMP on realised (co)variances in the eurozone sovereign debt market. ECB Working Paper 1629, European Central Bank.Google Scholar
- Brunnermeier, Markus, Thomas Eisenbach, and Yuliy Sannikov. 2013. Macroeconomics with Financial Frictions: A Survey. In Advances in Economics and Econometrics, ed. Daron Acemoglu, Manuel Arellano, and Eddie Dekel, 4–94. Cambridge: Cambridge University Press.Google Scholar
- Buchheit, Lee C., and G. Mitu Gulati. 2013. The Gathering Storm: Contingent Liabilities in a Sovereign Debt Restructuring. Unpublished, Duke University. Available on SSRN. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2292669. Accessed 16 February 2018.
- Cahill, Michael, Stefania D’Amico, Canlin Li, and John S. Sears. 2013. Duration Risk versus Local Supply Channel in Treasury Yields: Evidence from the Federal Reserve’s Asset Purchase Announcements. Federal Reserve Board.Google Scholar
- Cruces, Juan, Marcos Buscaglia, and Joaquin Alonso. 2002. The Term Structure of Country Risk and Valuation in Emerging Markets. Universidad de San Andres Working Paper 46.Google Scholar
- De Pooter, Michiel, Robert F. Martin, and Seth Pruitt. 2015. The Liquidity Effects of Official Bond Market Intervention. FRB International Finance Discussion Paper 1138, Board of Governors of the Federal Reserve System.Google Scholar
- Doran, David, Peter Dunne, Allen Monks, and Gerard O’Reilly. 2014. Was the Securities Markets Programme Effective in Stabilizing Irish Sovereign Yields? Unpublished (earlier version issued as Central Bank of Ireland Research Paper 07/RT/13).Google Scholar
- Duygan-Bump, Burcu, Patrick Parkinson, Eric Rosengren, Gustavo Suarez, and Paul Willen. 2013. How Effective Were the Federal Reserve Emergency Liquidity Facilities? Evidence from the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. Journal of Finance 68(2): 715–737.CrossRefGoogle Scholar
- Gagnon, Joseph, Matthew Raskin, Julie Remache, and Brian Sack. 2011. Large-Scale Asset Purchases by the Federal Reserve: Did They Work? Federal Reserve Bank of New York Economic Policy Review 17(1): 41–59.Google Scholar
- Härdle, Wolfgang Karl, and Piotr Majer. 2012. Yield Curve Modeling and Forecasting using Semiparametric Factor Dynamics. SFB 649 Discussion Paper, Humboldt University, Berlin.Google Scholar
- Hume, Neil. 2010. The peripheral bond buyer of last resort. FT Alphaville, December 13, 2010. http://ftalphaville.ft.com/blog/2010/12/13/434886/the-peripheral-bond-buyer-of-last-resort.
- International Monetary Fund. 2013. Unconventional Monetary Policies: Recent Experience and Prospects. Special Report, April 18, 2013. https://www.imf.org/external/np/pp/eng/2013/041813a.pdf.
- Joyce, Michael, Ana Lasaosa, Ibrahim Stevens, and Matthew Tong. 2011. The Financial Market Impact of Quantitative Easing in the United Kingdom. International Journal of Central Banking 7(3): 113–161.Google Scholar
- Mesters, Geert, Bernd Schwaab, and Siem Jan Koopman. 2014. A Dynamic Yield Curve Model with Stochastic Volatility and Non-Gaussian Interactions: An Empirical Study of Non-Standard Monetary Policy in the Euro Area. Tinbergen Institute Discussion Paper 14-071/III.Google Scholar
- Nelson, Rebecca M., Paul Belkin, and Derek E. Mix. 2010. Greece’s Debt Crisis: Overview, Policy Responses, and Implications. CRS Report for Congress, Congressional Research Service. http://fpc.state.gov/documents/organization/142363.pdf.
- Oehmke, Martin, and Adam Zawadowski. 2014. The Anatomy of the CDS Market. Unpublished draft.Google Scholar
- Pelizzon, Loriana, Marti Subrahmanyam, Davide Tomio, and Jun Uno. 2014. The Microstructure of the European Sovereign Bond Market: A Study of the Euro-zone Crisis. Unpublished.Google Scholar
- Vayanos, Dimitri, and Jean-Luc Vila. 2009. A Preferred-Habitat Model of the Term Structure of Interest Rates. NBER Working Paper 15487.Google Scholar
- Wooldridge, Jeffrey M. 2002. Econometric Analysis of Cross-Section and Panel Data. Cambridge: MIT Press.Google Scholar