Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets

Udaibir Das · Michael G. Papaioannou · Christoph Trebesch

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Abstract

Top down spillovers of sovereign default risk can have serious consequences for the private sector in emerging markets. This paper analyzes the effects of these spillovers using firm-level data from 31 emerging market economies. We assess how sovereign risk affects corporate access to international capital markets, in the form of external credit (loans and bond issuances) and equity issuances. The study first analyzes the impact of sovereign debt crises during the 1980s and 1990s. It goes on to examine the 1993 to 2007 period, using additional measures of sovereign risk-sovereign bond spreads and sovereign ratings-as explanatory variables. Overall, we find that sovereign default risk is a crucial determinant of private sector access to capital, be it external debt or equity. We also find that crisis resolution patterns matter and that defaults towards private creditors have stronger adverse consequences than defaults to official creditors.

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References

2004The determinants of cross-border equity flows 2000A New Database on the Structure and Development of the Financial Sector 2006Political risk, institutions and foreign direct investment 2005A Review of the Empirical Literature on FDI Determinants 2008Systemic Banking Crises: A New Database 2008Why Doesn't Capital Flow from Rich to Poor Countries? An Empirical Investigation 2004The determinants of foreign direct investment into European transition economies 1999The External Wealth of Nations Measures of Foreign Assets and Liabilities for Industrial and Developing Countries

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