Loose Lips Sink Euro Bond Markets in Crisis: Cutting Research
July 12, 2013 Leave a comment
Loose Lips Sink Euro Bond Markets in Crisis: Cutting Research
A European Central Bank paper released last week used 25,000 news media releases between January 2009 and October 2011 to investigate how much political communications affected sovereign bond yields during the region’s fiscal crisis. The ECB study focused on public pronouncements on fiscal policy and state finances by officials. It found in the short term that certain types of commentary had a quantifiable effect on the spread between the bond yields of Greece, Ireland and Portugal over German bunds. The impact was biggest for Greece. Policy makers at the regional level communicated more positively on average by using words such as “implement.” For those at the national level, the most-used word was “fail.”The paper found that “at several points during the crisis, certain types of political communication may have added uncertainty rather than certainty to market perceptions,” said economists Marion Salines and Gabriel Glockler of the ECB, along with Thomas Gade of the Danish central bank and the Bundesbank’s Steffen Strodthoff.
“Unconstructive and inconsistent communications can have real and tangible effects on countries, their financing conditions and by extension on their populations, as well as on the cohesion of the euro area,” they said.
The research also found that the potential for confusing communication is “structurally higher” in the euro region because central bank bailouts are harder in the bloc; there are 17 national discourses, governments and policies; and because of the complexity of regional policy making.
“The absence of clearly defined centers of political authority (e.g. there is no ‘euro area treasury secretary’) leads to a dispersion of the focus of market attention and concomitantly more ‘noise’ in political communication,” they said in the report.
Communications could be made more effective although “under no circumstances should the open political discourse in Europe’s liberal democracies be subordinated to the ostensible necessities of sovereign debt markets,” the report concluded.
To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net
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