FXstreet.com (Barcelona) - As greater recourse is made to the Euro area’s bailout funds (EFSF/ESM), core Euro area countries will accumulate new financial liabilities. We investigate whether the build up of a country’s sovereign liabilities stemming from this source exerts a different impact on a country’s bond spread over Germany, which would arise were the country simply to issue its own sovereign debt. Moreover, we attempt to evaluate the robustness of core countries’ spreads to possible changes in EFSF/ESM issuance.

According to the Economics Research Team at Goldman Sachs, “The Analysis of the data suggests that the composition of the accumulation of sovereign liabilities can in fact matter – we find that an increase in EFSF/ESM issuance could have an outsized impact on sovereign spreads in core countries with weaker fiscal fundamentals (the so-called ‘vulnerable’ set: Belgium, Austria and France).”

“By contrast, the difference in the impact of EFSF/ESM versus national issuance on sovereign spreads is expected to be negligible in those countries with stronger fiscal fundamentals (the ‘resilient’ set: Finland and the Netherlands). We also find that the difference between a country’s debt-to-GDP ratio and that of Germany amplifies the impact of rising EFSF/ESM exposure on the spread in vulnerable countries, while it dampens it in resilient countries.” they add.