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

3 Issuing costs of state guaranteed bonds
3.6 Indirect effects of state guarantees on issuing cost
This section provides empirical results on the indirect effects of state guarantees on issuing costs.
For a given bond, indirect effects are defined as issuing costs resulting from other bond issuance
activity. Spill-over effects – the specific effect on non-SG bond issuing costs of SG bond issuance
activity – are a subset of indirect effects and are also considered in this section.
Since state guarantees constitute state aid, which is inconsistent with Internal Market rules except
under specific conditions (Article 107 TFEU), the Commission are interested in the extent to which
they distort competition among banks that used state guarantees and those that did not.
One previous study (Ait-Sahalia et al., 2009) has considered indirect effects of state guarantees
through an event study of the announcement of state guarantee schemes in the euro area, UK and
US on issuing costs. 14 It finds that the announcement of state guarantee in the euro area, UK and
US prior to the collapse of Lehman Brothers led to a reduction in issuing costs in other territories.
However, it found that announcements of schemes after the collapse of Lehman Brothers had no
statistically significant impact on issuing costs.
These findings are summarised in Figure 18 through the light yellow bars. The figure shows that
the contribution of announcements of state guarantees to changing issuing costs overall was in the
order of +/- 5 bps in the euro area and UK.
14 This study analyses developments in the LIBOR-OIS spread as a measure of the interbank risk premium.
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