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of the European Council for Modelling and Simulation



The European Stability Mechanism And Sovereign Bond Yields: An Analysis In Light Of New Debates


Eszter Boros, Gabor Sztano

Published in:



2020). ECMS 2020 Proceedings Edited by: Mike Steglich, Christian Muller, Gaby Neumann, Mathias Walther, European Council for Modeling and Simulation.



ISSN: 2522-2422 (ONLINE)

ISSN: 2522-2414 (PRINT)

ISSN: 2522-2430 (CD-ROM)


ISBN: 978-3-937436-68-5
ISBN: 978-3-937436-69-2(CD)


Communications of the ECMS , Volume 34, Issue 1, June 2020,

United Kingdom


Citation format:

Eszter Boros, Gabor Sztano (2020). The European Stability Mechanism And Sovereign Bond Yields: An Analysis In Light Of New Debates, ECMS 2020 Proceedings Edited By: Mike Steglich, Christian Mueller, Gaby Neumann, Mathias Walther European Council for Modeling and Simulation. doi: 10.7148/2020-0065



The sovereign debt crisis revealed that there was a need for a bailout mechanism in the then prevailing framework of the euro area (EMU). In 2010, bond spreads of troubled periphery sovereigns started to soar relative to the core countries, threatening monetary policy transmission. Ever since, the ways of crisis management and EMU institutional reforms have been sparking a conflict between a German view of country-level responsibility and French-Italian calls for more risk sharing. The most recent chapter of this debate is about the ongoing reform of the European Stability Mechanism (ESM). This paper focuses on the evolution of the EMU financial assistance framework, up until the latest concerns of Italy. Our key question is whether policy steps resulting in a permanent bailout mechanism have played a role in driving sovereign yields. By using an event study approach and panel regressions, we find that related announcements have significantly contributed to a decrease in periphery sovereign bond yields. This result suggests that markets reacted positively, and their expectations moved toward a more integrated and resilient European financial market. For debates on the ESM overhaul, this contribution to financial stability should serve as a common ground. A “package approach” bundling multiple key reforms together, as stressed by Italy, may well also need to be taken into account.

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