Appendix I. Description of Variables
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)| false Borensztein, Eduardo, Eduardo Levy Yeyatiand Ugo Panizza, 2006, “ Living with Debt. How to Limit the Risks of Sovereign Finance,” ( Washington: Inter American Development Bank) and ( Cambridge: David Rockefeller Center for Latin American Studies, Harvard University).
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Kevin Cowan is with the Central Bank of Chile. We thank Sergio Godoy, Ugo Panizza and participants at the Inter American Development Bank and Central Bank of Chile workshops, and the LACEA 2006 and SECHI 2006 meetings for valuable comments and suggestions.
There is, however, a broader literature on sovereign credit ratings more generally, which is less directly related with the subject of this paper.
In the case of Venezuela, the 2005 default corresponds largely to an oversight on the part of the government of the payment of an oil-price linked bond clause that took a little too long to be redressed. Although the country did receive a “selective default” rating briefly, there was never the expectation that Venezuela would attempt to restructure the terms of its debt.
The issue of contagion “via Wall-Street” has received considerable recent attention (Calvo, 2005). Recent research on ‘institutional’ determinants of contagion confirms this view by linking financial contagion to characteristics of developed economy markets and investors. Private sector borrowing may be ‘contaminated’ by a sovereign default if they both belong to a particular asset class (Rigobon, 2001), borrow from the same banks (Van Rijckeghem and Weder, 2000) or share a set of overexposed mutual funds (Borensztein and Gelos, 2003).
See Altman (2000). We tested the robustness of our results to the inclusion of additional firm level financial variables drawn from Moyer (1977) and Blume, Lim and Mackinlay (1998). Our results are robust to these alternative specifications. We are, however, leaving aside a third strand of the corporate default literature – that based on option pricing models. We do this because of the data and computational requirements of this methodology, and the high level of noise that may affect emerging economies’ stock markets, from which equity prices must be read.
We also included firm fixed effects. The results do not change.
See Cantor and Packer (1996) for a detailed discussion. In cross section of sovereign ratings, they find that upwards of 90% of variance can be explained by these five variables.
Standard and Poor’s (2001a) defines Foreign Currency Credit Rating as “A current opinion of a obligor’s overall capacity to met its foreign-currency-denominated financial obligations. It may take the form of either an issuer or an issue credit rating. As in the case of local currency credit ratings, a foreign currency credit opinion on Standard and Poor’s global scale is based on the obligor’s individual credit characteristics, including the influence of country or economic risk factors. However, unlike local currency ratings, a foreign currency credit rating includes transfer and other risks related to sovereign actions that may directly affect access to the foreign exchange needed for timely servicing of the rated obligation. Transfer and other direct sovereign risks addressed in such ratings include the likelihood of foreign-exchange control and the imposition of other restrictions on the repayment of foreign debt.”
For example, the test of whether minimum wages are binding (Maloney and Nuñez, 2001). We are indebted to Ugo Panizza for suggesting this nonparametric test.
Statistical tests reject the null hypothesis of equality in the values of the parameters across the two groups of economies.
In unreported regressions we replicate the specification from column (1) using lagged right-hand side variables to control again for possible endogeneity issues. Also we replicate (1) using the smaller half of the firms, as measured by assets. In both cases the results remain broadly unchanged.
In unreported regressions that exclude the sovereign rating, the estimated coefficients on both GDP per capita and the high income dummy are positive and significant.
We included only the sectoral dummy for the utility sector, which is the only statistically significant sector in this specification.