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The Impact of Debt Sustainability and the Level of Debt on Emerging Markets Spreads
Author:
Nazim Belhocine
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Mr. Salvatore Dell'Erba
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Series:
IMF Working Papers
Volume/Issue:
Volume 2013: Issue 093
Language:
English
Publication Date:
01 May 2013
DOI:
https://doi.org/10.5089/9781484382769.001
ISBN:
9781484382769
ISSN:
1018-5941
Pages:
31
Keywords:
WP; debt ratio; math; Sovereign debt; sovereign spreads; emerging markets debt; debt sustainability; debt level; financial market reaction; market expectation; spillover effect; market-perceived debt; present discounted value; debt benchmark; debt sustainability measure; expectations of fundamentals; world interest rate; sovereign bond spread; Debt sustainability; Fiscal stance; Emerging and frontier financial markets; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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How do financial markets respond to concerns over debt sustainability and the level of public debt in emerging markets? We introduce a measure of debt sustainability – the difference between the debt stabilizing primary balance and the primary balance–in an otherwise standard spread regression model applied to a panel of 26 emerging market economies. We find that debt sustainability is an important determinant of spreads. In addition, using a panel smooth transition regression model, we find that the sensitivity of spreads to debt sustainability doubles as public debt increases above 45 percent of GDP. These results suggest that market interest rates react more to debt sustainability concerns in a country with a high level of debt compared to a country with a low level of debt.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund