The role of creditor seniority in Europe's sovereign debt crisis

Abstract

The share of public debt that is held by lenders with preferred creditor status (i.e. the IMF, ECB, ESM, etc.) has increased substantially during Europe's sovereign debt crisis. Empirically, we document in both macro and survey data that there exists a close relationship between the increase in senior tranche lending and the interest rates of countries in crisis. With regard to policy implications, we point out a predicament that policymakers are facing: while aiming to stabilize interest rates at a reasonable level, providing further senior loans might achieve just the opposite, as private markets are gradually pushed into a junior position.--Sven Steinkamp and Frank Westermann C r e d i t o r s e n i o r i t y Economic Policy July 2014 Printed in Great Britain

The Robustness of the Sovereign-Bank Interconnection: Evidence from Contingent Claims Analysis

“…The basic idea is that even though de jure there is no explicit seniority to a particular group of creditors, almost all market participants expect multilateral creditors' holdings to be senior to private markets. Rating agencies' downgrade of euro area countries during the sovereign debt crisis were also explicitly motivated by seniority issues (see Steinkamp and Westermann (2014)). The Greek debt restructuring of 2012 also validated this differentiation where we observe asymmetrical losses across creditors and across debt instruments based on the seniority of creditors and maturity of different bonds (see, e.g., Zettelmeyer et al (2013)).…”

Multilateral Loans and Interest Rates: Further Evidence on the Seniority Conundrum

“…It is an updated version of Table 2 in Steinkamp and Westermann (2014). The senior tranche variable is statistically significant.…”

“…The first wave of the survey was conducted by the ifo Institute in Munich in April 2013 and was analyzed in our earlier article (Steinkamp and Westermann, 2014). Survey participants were asked whether they expected certain parts of the rescue funds to have a preferred-creditor treatment in case of default.…”

Interest rate spreads in the eurozone: Fundamentals or sentiments?

“…These papers differ in (1) the endogenous variable which is bond yield spreads (e.g., Attinasi et al 2011;Gerlach et al 2010;De Grauwe and Ji 2013;Steinkamp and Westermann 2014) or CDS spreads (Aizenman et al 2013), (2) the main explanatory variable which is ''fiscal space'' (Aizenman et al 2013), the debt-GDP ratio (De Grauwe and Ji 2013), the size of the banking sector (Gerlach et al 2010), announcements of bank rescue packages (Attinasi et al 2011), or the share of liabilities held by senior creditors (Steinkamp and Westermann 2014), and (3) the econometric method employed, which is fixed effect panel estimation (De Grauwe and Ji 2013;Steinkamp and Westermann 2014), dynamic panel estimation (Attinasi et al 2011;Aizenman et al 2013) or a random coefficients model (Gerlach et al 2010).…”