Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets

By E. Baldacci, S. Gupta, Amine Mati. Social Science Research Network, 2008

159 citations recorded by the source corpus.

Using a panel of 30 emerging market economies from 1997 to 2007, this paper investigates the determinants of country risk premiums as measured by sovereign bond spreads. Unlike previous studies, the results indicate that both fiscal and political factors matter for credit risk in emerging markets. Lower levels of political risk are associated with tighter spreads, while efforts at fiscal consolidation narrow credit spreads, especially in countries that experienced prior defaults. The composition of fiscal policy matters: spending on public investment contributes to lower spreads as long as the fiscal position remains sustainable and the fiscal deficit does not worsen.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/8f8f15450ec6330c5bbf1038696e91b8cde43005

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Citations in the corpus

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).”
The Greek financial crisis: growing imbalances and sovereign spreads (2012, methodology): “Much of the earlier work on the determinants of sovereign spreads relates to emerging market economies and covers external debt traded during the 1990s (Min, 1998; Ferrucci, 2003; Grandes, 2007; Baldacci et al., 2008; Alexopoulou et al., 2010).”
Foreign Participation in Emerging Markets’ Local Currency Bond Markets (2010, background): “Previous studies on EMs have generally focused on explaining the determinants of sovereign foreign currency (EMBIG) spreads (Baldacci, Gupta, and Amine, 2008; Gonzales-Rosada and Levy-Yeyati, 2006; and IMF, 2006).”
How Effective is Fiscal Policy Response in Systemic Banking Crises? (2009, background): “For example, revenue-based adjustments lower government spreads more than expenditure-based ones, and debt-financed spending increases sovereign risks.10 Baldacci, Gupta, and Mati (2008) find that the composition of fiscal policy matters for government spreads, but debt levels matter as well.”