This paper examines the effect of national reform efforts by Greece, Ireland, Italy, Portugal and Spain (GIIPS) on their respective bond-yields during Europe’s sovereign debt crisis. To what extent have these countries’ policy-makers been able to reassure markets with their commitments to reform their economies? We argue that the relation between sovereign debtors and private creditors is best captured by the sociological concept of trust. Trust is defined as the belief shared among bond-market investors that a country’s commitment to improve its fiscal position and its economic prospects is indeed credible. The key question is which commitments are seen as sufficiently credible, thus reducing yields, and which are seen as cheap, thus failing to produce an effect. We code all major statements and decisions by the GIIPS countries, and analyze their effects in an event analysis, using a finite distributed lag (FDL) model.
