3 Issuing costs of state guaranteed bonds - Financial Risk and ...

3 Issuing costs of state guaranteed bonds
To account for this possibility, country dummies were added to the main empirical specification.
However, the previously reported average estimated impact of state guarantees on issuing cost is
robust to this change.
A third hypothesis is that differences in bond clauses actually account for differences in issuing
cost across non-SG and SG bonds. In an earlier section, for example, it was noted that the presence
of a negative pledge clause (reducing credit risk for investors) is likely to be reflected in a lower
issuing cost. If SG bonds contain a disproportionate amount of negative pledge clauses, these may
show up as the impact of state guarantees when they are not.
To account for this, bond clauses were added as controls to the main empirical specification and,
as with country dummies, the main result on the impact of state guarantees is robust to this
change.
3.5.9 Sensitivity of empirical strategy
Our main empirical specification used the population of eligible banks and non-SG bonds as the
control group for measuring the impact of state guarantees on issuing cost. This is reasonable as
long as the controls chosen sufficiently capture differences in issuing costs not accounted for by
state guarantees.
However, there remains the concern that unobservable differences between SG and non-SG bonds
are driving the main results.
Alternative weights for SG and non-SG bonds were used to test for the sensitivity of our empirical
strategy to unobservables and as shown in columns 10-12 of Table 9.
Two control groups were constructed to control for unobserved time- and Member-State-specific
factors, which includes specificities in bond market conditions, other public support measures,
short-term funding and central bank measures.
Practically, non-SG bonds issued at the same time and/or relating to the same country of risk as SG
bonds were given more weight in the analysis as they were viewed to share greater similarlities
than other non-SG bonds.
Qualitatively, the main result holds across all three alternative weights specified. That is, state
guarantees reduce issuing cost to a statistically significant degree whether non-SG bonds issued at
the same time as SG bonds are emphasised in the control group and/or non-SG bonds relating to
the same country of risk are emphasised in the control group.
Quantitatively, the average impact of a state guarantee is in the region of 45-55bps reduction in Zspread
based on two of the alternative weighting schemes. This is in the region of the majority of
other alternative specifications considered.
However, the comparison of SG and non-SG bonds relating to the same country of risk suggests
that the average impact of a state guarantee on reducing issuing cost is 18bps (column 11 in Table
9). This is interesting because it suggests that state guarantees are more effective in some
Member States than others even accounting for differences in sovereign risk (reflected through
the sovereign CDS) and country risk controls.
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