Global monetary conditions versus country-specific factors in the determination of emerging market debt spreads☆

By Mansoor Dailami, Paul R. Masson, Jean Jose Padou. 2005

113 citations recorded by the source corpus.

The authors offer evidence that U.S. interest rate policy has an important influence in the determination of credit spreads on emerging market bonds over U.S. benchmark treasuries and therefore on their cost of capital. Their analysis improves on the existing literature and understanding by addressing the dynamics of market expectations in shaping views on interest rate and monetary policy changes and by recognizing nonlinearities in the link between U.S. interest rates and emerging market bond spreads, as the level of interest rates affect the market's perceived probability of default and the solvency of emerging market borrowers. For a country with a moderate level of debt, repayment prospects would remain good in the face of an increase in U.S. interest rates, so there would be little increase in spreads. A country close to the borderline of solvency would face a steeper increase in spreads. Simulations of a 200 basis points (bps) increase in U.S. interest rates show an increase in emerging market spreads ranging from 6 bps to 65 bps, depending on debt/GDP ratios. This would be in addition to the increase in the benchmark U.S. 10 year Treasury rate.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/35dbf8838c30724d93fbf20222bb0b412d5ed02d

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In Economics and Econometrics

1. E. Baldacci
2. S. Gupta
3. Amine Mati
4. Dominik Maltritz
5. Tigran Poghosyan

In Finance

1. E. Baldacci
2. Amine Mati
3. S. Gupta
4. Dominik Maltritz
5. Tigran Poghosyan

Citations in the corpus

• Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt (2010, unknown): “…Singleton (2008) find that the VIX is statistically significant in explaining CDS spreads of Mexico, Turkey, and Korea.15 The finding of a positive coefficient on the 10-year U.S. Treasury yield is consistent with the findings of Arora and Cerisola (2001) and Dailami et al. (2005), among others.”
• Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets (2008, background): “Dailami, Masson, and Padou (2005) also point to nonlinear effects of common factors on spreads depending on countries’ vulnerability conditions.”
• Determinants of sovereign yield spreads in the Eurozone: A Bayesian approach (2012, background): “Examples of papers that employ panel data on developing countries’ secondary market yield spreads are: Baldacci et al. (2008), Dailami et al. (2005), Hilscher and Nosbusch (2010), and Rowland and Torres (2004).”