Sub-National Government’s Risk Premia: Does Fiscal Performance Matter?

May 29, 2015

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Sergio Sola, and Geremia Palomba. Sub-National Government’s Risk Premia: Does Fiscal Performance Matter?, (USA: International Monetary Fund, 2015) accessed September 24, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the determinants of sub-national governments risk premia using secondary market data for U.S., Canada, Australia and Germany. It finds that, as for central governments, fiscal fundamentals matter in the pricing of risk premia, and sub-national governments with higher public debt and larger deficits pay higher premia. However, this relationship is not uniform across countries. Market pricing mechanisms are less effective in presence of explicit or implicit guarantees from the central government. Specifically, we show that in pricing risk premia of sub-national governments, markets are less responsive to fiscal fundamental when sub-national governments depend on high transfers from the central government, i.e., when there is some form of implicit guarantee from the center. Using primary market data, the paper also looks at whether transfer dependency from the central government influences sub-national governments’ incentive to access markets. We show that high transfer dependency lowers the probability of sub-national governments to borrow on capital markets.

Subject: Asset and liability management, Bonds, Financial institutions, Fiscal federalism, Fiscal policy, Fiscal stance, Liquidity, Sovereign bonds, Stocks

Keywords: Bonds, Dispersed SNG spread, Fiscal federalism, Fiscal policy, Fiscal stance, GDP growth, GDP ratio, Global, Government debt, Interest rates, Liquidity, Markets price sub-national governments, Primary market, Risk premia, Secondary market, SNGS issue debt, Sovereign bonds, Sub-national governments, Transfer dependency, WP, Yield to maturity

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/117
Stock No:

WPIEA2015117
ISBN:

9781513511061
ISSN:

1018-5941

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