Appendix. Data and Descriptive Statistics
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This Working Paper was published as Chapter 7 of the book “Debt Relief and Beyond: Lessons Learned and Challenges Ahead.” The International Bank for Reconstruction and Development, The World Bank is the source and copyright holder of this work. The authors thank Galina Hale and Carlos Arteta for kindly sharing their dataset of explanatory variables.
There is a growing body of literature on “bottom-up” risk transfers and private sector contingent claims (see, for example, Honohan and Laeven 2005; Gray, Merton, and Bodie 2007; Gapen et al. 2008).
The analysis does not extend to the period of the current global financial crisis, because adequate 2008 data were not available for the set of countries included.
Portes, Rey, and Oh (2001), Gelos and Wie (2005), and Portes and Rey (2005) highlight informational frictions and lack of transparency as obstacles to equity and portfolio investments and financial asset transfers to emerging markets.
The Lucas paradox is the observation of low net capital flows from developed countries to developing countries despite high rate-of-return differentials.
A small body of literature examines the determinants of capital market access by sovereign borrowers (see, for example, Grigorian 2003; Gelos, Sandleris, and Sahay 2004; Erce 2008), and Fostel and Geanakoplos (2008) provide some stylized facts on sovereign bond issuances in emerging markets. However, the general link between sovereign and private sector access to external capital in emerging markets remains largely unexplored.
Kaminsky, Reinhart, and Vegh (2004) highlight the fact that ratings of middle-income countries tend to show much greater variability than ratings of high- or low-income countries.
Bevan and Estrin (2004)find that FDI flows to Eastern European countries are not affected by sovereign ratings. Their results are at odds with those of Garibaldi et al. (2001), who do find an important role of sovereign risk for capital flows to transition economies.
Rose (2005) andMartinez and Sandleris (2008) find that sovereign defaults also affect trade flows. Levy-Yeyati and Panizza (2005) andBorenzstein and Panizza (2008) suggest that defaults tend to cause output losses.
A related study, by Zanforlin (2007), comes to roughly the same conclusion by applying probit and multivariate probit models.
The Dealogic data on bond and, particularly, syndicated loan spreads are very incomplete, making average spread levels per country and month/quarter too noisy to allow for a meaningful analysis. We therefore focus on issued volumes only.
It is not possible to disentangle the volumes of equity sold to domestic versus international investors. The results regarding equity thus represent corporate access to capital on both national and international markets.
Arteta and Hale (2008) exclude countries for which the total amount of bonds and loans is zero for more than 24 months out of the 264 months in the sample.
Given the focus on sovereign risk, we also exclude restructuring events of private-to-private debt, such as those in the Republic of Korea in 1997 and Indonesia in1998.
Arteta and Hale (2008) rely on the list of restructuring events in the Global Development Finance report (World Bank 2002, 2003), a comprehensive and widely used source. Our coding process revealed that these lists contain some errors and omission. Sometimes interim agreements are listed as final agreements. In other instances, agreements are listed as finalized although they were postponed or never implemented.
Data could be furnished upon request.
The definition of crisis episodes matters significantly. In some cases, such as Peru in the 1980s, governments were in default several years before engaging in restructuring negotiations with private creditors.
Note that delays caused by creditor coordination failure or outright intercreditor disputes are explicitly excluded from the coding. Trebesch (2009) disentangles debtor- and creditor-induced delays explicitly.
We thank the authors for kindly sharing their extensive data set.
For coherence, we also measured the dependent variable of corporate credit as a monthly deviation from the 25-year average. Following Arteta and Hale (2008), we also deflate the amount of credit using the U.S. consumer price index in this part of the analysis.
To verify, we also use a dummy for cases in which the total number of affected people represented more than 5 percent of the population.
This transformation does not alter the main results. The effect of defaults on private sector credit is highly significant and robust when using the dependent variable in log form.
A main benefit of showing results as they are is that coefficient sizes are easy to interpret. In fact, the coefficients for the main dummy variable of default episodes simply represent the size of the percentage change in credit relative to what it would have been if no default had occurred that year. A further advantage is that results remain comparable to those in Arteta and Hale (2008).
Our main results on the effects of sovereign risk were robust even in an empirical setup with quarterly data for the post–1993 period.
Note, however, that the positive effect of IMF programs can be replicated in the quarterly data setup for the post–1993 period used below.
Based on the literature on the determinants of sovereign credit ratings (see Ratha, De, and Mohapatra 2007 for an overview), we include the following set of explanatory variables in the first stage: inflation, growth, log of GDP per head, total external debt to GDP, and total external debt to exports.
Of course, low volumes of government debt issuances may also be driven by demand effects (for example, periods during which the sovereign does not wish or need to borrow). See the discussion in Gelos, Sandleris, and Sahay 2004.
In the robustness analysis, we also use the ratio of budgetary balance to GDP to validate the findings relating to inflation. Fiscal account data are available only for a subset of countries and years, limiting the number of observations.
The simple correlation of total capital volumes (log) with logged countrylevel debt and equity issuances is 0.27 and 0.31, respectively.
Results are not reported but are available upon request.
Even an interaction term between sovereign ratings and sovereign debt issuance turned out to be insignificant with regard to corporate debt issuance.