Disappearing government bond spreads in the eurozone – Back to normal?
Since the announcement of the Outright Monetary Transactions (OMT) programme by Mario Draghi, President of the ECB, in 2012, the government bond spreads began a strong decline. This paper finds that most of this decline is due to the positive market sentiments that the OMT programme has triggered and is not related to underlying fundamentals, such as the debt-to-GDP ratios or the external debt position that have continued to increase in most countries. The authors even argue that the market’s euphoria may have gone too far in taking into account the same market fundamentals. They conclude with some thoughts about the future governance of the OMT programme.
Paul De Grauwe is John Paulson Professor in European Political Economy at the London School of Economics and Associate Senior Research Fellow at CEPS. Yuemei Ji is a researcher at Brunel University.