What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?

Barry J. Eichengreen · Ashoka Mody

505 citations0/0 files storedNational Bureau of Economic Research

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Credit Risk and Financial Regulations Financial Markets and Investment Strategies Global Financial Crisis and Policies

Abstract

In this paper we analyze data on nearly 1, 000 developing-country bonds issued in the years 1991-96 the recent episode of heavy reliance on bonded debt. We analyze both the issue decision of debtors and the pricing decision of investors, minimizing selectivity bias by treating the two issues jointly. Overall, the results confirm that higher credit quality translates into a higher probability of issue and a lower spread. Importantly, however, we find that observed changes in fundamentals explain only a fraction of the spread compression in the period leading up to the recent crisis in emerging markets.

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2009Sovereign default and debt renegotiation 2004Sovereign Borrowing by Developing Countries: What Determines Market Access?2003Country Spreads and Emerging Countries: Who Drives Whom?2002Emerging Market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?2001Procyclicality of the financial system and financial stability: Issues and policy options 2007Emerging markets’ spreads and global financial conditions 2005News spillovers in the sovereign debt market 2007Sovereign debt crises and credit to the private sector

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