A bond issued by the government as a whole – including, in some statistics, public-sector entities within the government as a whole. – In times of uncertainty on the financial market, government securities are increasingly in demand, causing their price to rise and the yield to fall. The creditworthiness of the government as an issuer of bonds is apparently rated higher by investors than that of companies. This is because only the state has the option of levying compulsory taxes. In this way, it can obtain the means to maintain its financial capacity to act and service its debts. – Admittedly, it has been shown on several occasions, especially during the Greek crisis, that when a state becomes overindebted and is threatened with national bankruptcy, confidence in these securities suddenly diminishes and investors empty their portfolios. However, it is questionable if in such cases the government bonds were guaranteed by institutions such as the European Stabilization Mechanism. This creates the wrong incentives for deficit countries and for buyers of their debt instruments. After all, one can trust that the taxpayers of other states will step in if necessary. For this reason, the stabilization fund for financially weak euro members was set up only until 2013, mainly under pressure from Germany. From then on, holders of government bonds will have to be prepared to waive part of their claims in order to save a country in difficulty. This announcement alone meant that, from 2013, maturing government bonds of shaky EMU member states such as Greece, Ireland, Portugal, Spain and Italy were traded at a steep discount. This, in turn, led to sometimes fierce reproaches against Germany, which – as the main financier of these countries’ sovereign debt – was accused of a lack of solidarity. As is often the case, those states were blamed which made part of the social product generated by their citizens available to bail out others instead of increasing the pressure on those living beyond their means. – At the beginning of March 2012, the holders of Greek government bonds were “voluntarily compelled” to waive half of their claims. – However, the fact that the European Financial Stabilization Facility, according to the ideas of many politicians, is to serve as a catch-all for government bonds that have become worthless – bypassing applicable law – sends out worrying signals for the future of the eurozone. – The experience with Greek government bonds, whose market value fell by as much as half in some cases in 2011, has led to many banks also backing government bonds on their books with equity capital, above and beyond the capital adequacy requirements of Basel III. In the Asset Quality Review, the valuation of government bonds is considered one of the biggest problems. However, there is now no dispute that these securities should always be given a well-founded risk weight. “Safehaven government bonds” no longer exist. – See agency bonds, bail-out, balance sheet tricks, sovereign, blame game, European Monetary Union, fundamental error, ECB sin, fiscal agent, money multiplication, monetary union internal, creïrung, moral hazard, policy default, debt sustainability, seven percent limit, sovereign securities, southern front, transfer union, asset levy, treaty fidelity, foreshadowing, yield curve, forced expropriation. – On international yield differentials and the implications, see ECB Monthly Bulletin, April 2005, p. 10 et seq, ECB Monthly Report of September 2005, pp. 35 ff. (here also linking yield differentials between individual government bonds and credit ratings), Deutsche Bundesbank Monthly Report of October 2006, pp. 29 ff. (detailed presentation with many overviews), ECB Monthly Report of November 2008, pp. 34 ff. (yield differentials also between the bonds of individual euro area members; overviews), ECB Monthly Report of December 2008, pp. 39 et seq. (strong volatility of government bond yields as a result of the financial crisis; overviews), ECB Monthly Bulletin of September 2009, p. 38 et seq. (government bond yield spreads in the euro area during the financial crisis, overviews; references), BaFin Annual Report 2009, p. 23 (comparison of ten-year government bond yields in Germany and the U.S. since 2005), Financial Stability Report 2010, pp. 34 et seq. (setback risks for government bonds), Deutsche Bundesbank Monthly Report of June 2011, p. 29 et seq. (yield differentials of government bonds in the euro area; overviews; explanatory approaches), Deutsche Bundesbank Monthly Report of November 2011, p. 43 (premiums on Pigs government bonds since 2009), ECB Annual Report 2011, p. 43 et seq. (transmission effects of government bond uncertainties to other sectors of the economy; overviews), ECB Monthly Report of March 2012, pp. 51 ff. (Issues and holdings of government bonds since 2006 in the euro area broken down by various aspects; numerous charts; trend toward substitution of long-term bonds by short-term paper), Deutsche Bundesbank Monthly Report of November 2013, p. 33 f. (Government bonds held by domestic banks in the euro area; overview).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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