The Impact of Debt Sustainability and the Level of Debt on Emerging Markets Spreads

Author/Editor: Nazim Belhocine ; Salvatore Dell'Erba
Publication Date: May 01, 2013
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: 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.
Series: Working Paper No. 13/93
Subject(s): Debt sustainability | Public debt | Capital markets | Emerging markets | Economic models

Publication Date: May 01, 2013
ISBN/ISSN: 9781484382769/1018-5941 Format: Paper
Stock No: WPIEA2013093 Pages: 31
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