We find that countries which are able to borrow at spreads that seem low given fundamentals (for example because investors take a bullish view on a country's future), are more likely to develop economic difficulties later on. We obtain this result through a two-stage procedure, where a first regression links sovereign spreads to fundamentals, after which residuals from this regression are deployed in a second stage to assess their impact on future outcomes (real GDP growth and the occurrence of fiscal crises). We confirm the relevance of past sovereign debt mispricing in several out-of-sample exercises, where they reduce the RMSE of real GDP growth forecasts by as much as 15 percent. This provides strong support for theories of sentiment affecting the business cycle. Our findings also suggest that countries shouldn't solely rely on spread levels when determining their fiscal strategy; underlying fundamentals should inform policy as well, since historical relationships between spreads and fundamentals often continue to apply in the medium-to-long run.
Ramzy Al-Amine, Tim Willems, and Mr. Craig Beaumont
our baseline of l = 8 quarters).
Column (2) examines potential asymmetries (through interaction with a dummy which takes the value 1 in periods where µ < 0) and finds that the effect is most severe when countries are able to borrow at a discount; episodes where countries are only able to borrow at a “penalty” (µ > 0), seem less harmful. When µ < 0, a one standard deviation spreaddiscount is expected to reduce growth by 0.270 percentage points – an effect which is larger than that for the spread level itself (0.225). This suggests that a country is particularly
country’s fundamental macroeconomic and debt situation—remain the primary determinates of sovereign borrowing costs, but subscription to the SDDS also appears to entail significant savings. Based on sovereign foreign currency bond issues in primary capital markets over the period 1990 to 2002, the SDDS spreaddiscount for a group of emerging market economies borrowing in the three principal global currencies is estimated to be about 75 basis points.
The policy implications for sovereign borrowers are clear: macroeconomic and public debt fundamentals are of primary
Mr. Barry J. Eichengreen, Kenneth Kletzer, and Mr. Ashoka Mody
therefore gather the same data for four additional points in time and pool the five cross sections (for sources and further details, see Appendix II ). Our earlier analysis of launch spreads (viz. Mody, 2003 ) suggested that the point on the credit-quality scale at which the spreaddiscount for bonds with collective action clauses becomes a premium (where spreads are wider for bonds with CACs than bonds without them) depends on the state of the markets: when the markets are less skeptical or uncertain about emerging market debt, they apply a penalty for collective
-currency-denominated bonds, very much in line with the findings of secondary-market-based research. Specific bond characteristics—the currency denomination, global liquidity conditions, and a country's fundamental macroeconomic and debt situation—remain the primary determinants of sovereign borrowing costs, but subscription to the SDDS also appears to lead to significant savings. Based on sovereign foreign currency bond issues in primary capital markets over the period 1990 to 2002, the SDDS spreaddiscount for a group of 17 emerging market economies borrowing in the three principal
Does macroeconomic data transparency-as signaled by subscription to the IMF's Special Data Dissemination Standard (SDDS)-help reduce borrowing costs in private capital markets? This question is examined using detailed data on new issues of sovereign foreign currency-denominated (U.S. dollar, yen, and euro) bonds for several emerging market economies. Panel econometric estimates indicate that spreads on new bond issues declined by about 75 basis points following SDDS subscription.
econometric evidence of discounts for sovereign issuers participating in the GDDS, as well as emerging market countries subscribing to the SDDS. Estimated launch spreaddiscounts amount to about 9 percent for GDDS participants and 20 percent for SDDS subscribers, or the equivalent of 20 and 50 basis points, respectively. These results are consistent across the alternative specifications, stable over time, and broadly in line with estimates from other studies. 1 Modeling spreads as a function of sovereign credit ratings reinforce the results of models specified with key
Kenneth Kletzer, Mr. Barry J. Eichengreen, and Mr. Ashoka Mody
At the April 2003 meeting of the International Monetary and Financial Committees, it was decided to further encourage the contractual approach to smoothing the process of sovereign debt restructuring by encouraging the more widespread use of collective action clauses (CACs) in international bonds. This decision was shaped partly by Mexico's successful launch of a bond subject to New York law but featuring CACs, and by subsequent issues with similar provisions from other emerging market countries. This paper reviews the developments leading up to that event, its implications, and prospects for the future. It asks whether we can expect to see additional issuance by emerging markets of bonds featuring CACs, whether such a trend would in fact help to make the world a safer financial place, and what additional steps might be taken to further enhance modalities for crisis resolution.