The Effect of Fiscal Announcements on Interest Spreads : Evidence from the Netherlands

We estimate the effect of consolidation efforts on investors' perception of government's solvency. To this end, we analyze announcements by Dutch government officials between September 2008 and December 2014 and select those messages that contain relevant new information on the likelihood and substance of consolidation packages. We then scrutinize whether announcements affect the yield spread of Dutch ten year government bonds vis-à-vis German bonds. Our findings indicate that announcements hinting at improvements in the budget balance significantly lowered yield spreads. As most announcements involve events during the negotiation process on consolidation packages rather than the official date of agreement or implementation of these packages, our results illustrate the importance of accurately assessing the news content of messages