State-Market Interactions at the Height of the Eurozone Sovereign Debt Crisis

• In Event: 149 - Regular Session. Economic Sociology: Herds, Runs, Bubbles: Social Influences in Financial Markets

Abstract

This paper examines state-market interactions during financial crises using the case of Italian bond yield spreads during the crisis months of August to December 2011, and whether these responded to political promises. It is hypothesized that the potential for a global crisis creates a condition under which a traditional creditor run becomes less attractive for market actors and thus less plausible. When combined with the uncertainty created by political negotiations this manifests as creditor restraint and calmer bond-markets when market actors are mostly waiting on political results. Support for this theory is found in regression on bond market spreads. The findings suggest governments have some capacity to affect bond market movements in the case of systemically important countries facing a sovereign debt crisis. By indicating possible solutions to the crisis, and setting a deadline for their formalization, policy makers can calm markets in the interim period, potentially buying more time to reach a political solution.

Author

• Jason O. Jensen, McGill University