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debt, Europe, growth, Italy

Bailouts, spreads and yields in Germany, France and PIIGS

Stefano Fugazzi (ABC Economics) – Having previously observed the sovereign debt market reaction to the announcement of Greece’s bailout programmes, we now switch our focus to the EU financial assistance granted to three of the so called “peripheral Member States” of the euro zone: Ireland (who joined the EU aid programme in 2010), Portugal (2011) and Cyprus (2013).

Brief overview of the bailout programmes

2010 Economic Adjustment Programme for Ireland

The Economic Adjustment Programme for Ireland was formally agreed in December 2010. It included a joint financing package of €85 billion for the period 2010-2013.

This was based on contributions from the EFSM (€22.5 billion), the EFSF (€17.7 billion), bilateral contributions from the United Kingdom (€3.8 billion), Sweden (€0.6 billion) and Denmark (€0.4 billion) as well as funding from the IMF (€22.5 billion). Moreover, there was an Irish contribution through the Treasury cash buffer and investments of the National Pension Reserve Funds.

2011 Portuguese bailout

In April 7, 2011 Portugal requested financial assistance from the EU, the euro zone Member States and the International Monetary Fund (IMF). An Economic Adjustment Programme was negotiated in May 2011 between the Portuguese authorities and officials from the European Commission (EC), the European Central Bank (ECB) and the IMF.

The agreement on the Programme was formally adopted on May 17, 2011 at the euro group/ECOFIN meeting in Brussels. The Memorandum of Understanding and the Loan Agreement were signed thereafter. It covered the period 2011 to mid-2014 and included a joint financing package of €78 billion, €26 billion of which provided by the EU/EFSM, €26 billion by the EFSF and about €26 billion provided by the IMF.

The Programme contained reforms to promote growth and jobs, fiscal measures to reduce the public debt and deficit, and measures to ensure the stability of the country’s financial sector.

2013 Economic Adjustment Programme for Cyprus

Following a request by Cyprus on 25 June 2012, the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) agreed an Economic Adjustment Programme with the Cypriot authorities on April 2, 2013. The Programme was agreed by the euro zone Member States on April 24, 2013 and by the IMF Board on May 15, 2013. It covers the period 2013-2016. The financial package will cover up to EUR 10 billion; the ESM will provide up to EUR 9 billion, and the International Monetary Fund (IMF) is expected to contribute around EUR 1 billion.

Research objectives and sampling

In order to assess the sovereign bond market response to the announcement of the above-mentioned bailout programmes, we opted to include within our sample the 10-year yields of the so-called GIIPS countries (Greece, Ireland, Italy, Portugal and Spain) in addition to the French and German sovereign papers.

Main conclusions

In the case of the Irish bailout, on the basis of a 7-day horizon, spreads over the 10-year German sovereign paper remained broadly consistent – ranging from a low of -3 points for Spain to a high of +47 points for Greece  – with the sole exception of Ireland (+83 points over the estimation window).


A similar pattern was observed when the euro group agreed Portugal’s financial assistance package with spreads over the German bund remaining vastly unchanged  (movements ranged from +4 point for France to +24 for Irish government papers), the sole exception being Greece (104 points increase over the seven day spectrum).


 The sovereign debt markets warmly welcomed the rescue of Cyprus as spreads over the German 10-year bonds fell across the entire sample peaking -41 points in the case of the Spanish emissions.


As noted in the table below, on the basis of a 7-day horizon, government bonds yields decrease within the core members of the euro zone, namely France and Germany, and rise elsewhere within peripheral Europe.


Stefano Fugazzi (15 March 2015)

cover bailouts



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