## _wp1010 - 9. Robustness Analysis on the Effect of Sovereign Defaults

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---

### Scope and data
- Sample coverage and periods:
  - 31 major emerging-market economies (see Table 1 in the Annex).
  - Two main empirical windows: 1980–2004 (debt-crisis analysis) and 1993–2007 (spreads and ratings analysis).
- Dependent variables:
  - Volume of foreign corporate bonds and syndicated loans issued by private domestic corporations (aggregated from firm-level Dealogic data); measured as monthly percentage deviations from the 25-year country-specific mean in the 1980–2004 analysis.
  - Volume of equity securities issued by domestic corporations by country and quarter (Dealogic).
- Sovereign-risk measures:
  - Sovereign debt-crisis episodes and restructuring events (private-creditor focus).
  - Sovereign bond spreads (J.P. Morgan’s EMBI Global); distress threshold noted as spreads exceeding 1,000 basis points.
  - Sovereign ratings: Institutional Investor Rating (IIR) 0–100; Standard & Poor’s transformed to numerical 0 (selective default)–22 (AAA).
- Control variables and methodology:
  - Country and year fixed effects, robust errors clustered by country.
  - Large set of controls summarized by principal-component indices (international competitiveness; investment climate and monetary stability; financial development; long-run macro prospects; global supply of capital).
  - Controls for currency crises, systemic banking crises, natural disasters, real exchange rate, IMF programs (stand-by agreements), and global liquidity proxies (total emerging-market issuance, EMBI composite spread, VIX, Lehman High Yield spread).

### Main findings: sovereign defaults and corporate external credit (1980–2004)
- Sovereign defaults to private creditors cause a large contraction in private sector external borrowing:
  - Estimated drop in private-sector external borrowing of more than 40 percent, an effect that lasts for one year after the crisis ends.
- Comparison with prior work:
  - Effect sizes for defaults to private creditors are larger than those reported by Arteta and Hale (2008), who found a stronger adverse impact mainly for defaults to official (Paris Club) creditors.
  - Arteta and Hale (2008) reported a drop in foreign loans and bond issuance by domestic firms of more than 20 percent during defaults (for comparison).
- Debt-crisis characteristics and negotiation behavior:
  - Government-induced negotiation delays and outright refusals to negotiate (delays > three months or refusal to initiate talks) have additional negative effects on corporate borrowing; coefficient only weakly significant in some specifications.
  - Breakdowns caused by creditor actions (pre-restructuring litigation by creditors, holdouts/intercreditor disputes) show no significant negative spillovers on corporate borrowing in the estimations reported.
- Role of IMF programs:
  - IMF stand-by programs are associated with a positive effect on private sector credit during default episodes in some specifications, consistent with a catalytic role of IMF financing.
  - However, the positive IMF effect is not robust across all specifications (becomes insignificant when adding certain controls, e.g., a banking-crisis dummy); hence the IMF result should be considered with care.
- Time-variation and robustness:
  - The adverse effect of defaults and restructurings on private sector credit is stronger in the 1990s than in the 1980s.
  - Results are robust to using random-effects models, subperiods, inclusion of sudden-stop dummies, and alternative specifications; the main default effect remains highly significant and robust when the dependent variable is expressed in log form.

### Quantitative evidence from regressions (selected operational points)
- Table 1 (entire sample, 1980–2004) shows large negative coefficients on dummies for default/restructuring episodes with private creditors; coefficients imply percentage deviations in corporate credit volumes relative to nondefault years.
- Lag structure:
  - Lags up to three years after restructuring agreements are included to capture post-crisis effects (1–12 months, 13–24 months, 25–36 months).

### Sovereign spreads, ratings, sovereign issuance, and corporate capital access (1993–2007)
- Sovereign bond spreads:
  - Higher sovereign bond spreads (EMBI Global) are associated with reduced corporate debt and equity issuance.
  - A sovereign is typically regarded as distressed when its foreign-bond spread over U.S. Treasuries exceeds 1,000 basis points.
- Sovereign ratings:
  - Higher IIR and S&P scores are strongly positively associated with larger volumes of private-sector external borrowing, even after controlling for fundamentals and when using rating residuals (rating variation unexplained by fundamentals).
  - IIR measure specifics: range 0–100; one standard deviation increase in IIR (16.4) translates into a sizable economic effect on corporate borrowing (example transformation yields an increase in the coefficient of 1.5 when scaled by the IIR standard deviation).
  - S&P ratings transformed to 0–22 are used as an additional validation check.
- Sovereign issuance and market access:
  - Constructed “no sovereign issuance” dummy (value 1 if no public or public-corporate external debt raised in a given quarter) to capture possible sovereign market closures that coincide with private market closures.
  - Periods of low or no sovereign issuance, higher spreads, and lower ratings are associated with reduced corporate issuance—consistent with sovereign market conditions affecting private access.
- Global liquidity and other external factors:
  - Total issuance volumes in emerging markets (sum of private bond, syndicated loan, and equity issuance across the 31 countries, logged) is a quantitatively important determinant of country-level corporate issuance—confirming the crucial role of global liquidity.
  - Other external risk proxies (EMBI composite spread, VIX, Lehman High Yield spread) are included to control for global risk appetite and are found to matter for issuance volumes.

### Additional empirical insights and notable coefficients (selected exact figures)
- Table 3 (Dependent variable: log of total amount borrowed — corporate bonds and loans):
  - Rating (Residual): 0.18***, 0.16***, 0.18***, 0.18***.
  - Real Exchange Rate: -0.04***, -0.04***, -0.05***, -0.04***, -0.05***, -0.05***.
  - Total Capital Flows to EMEs: 1.19***, 1.06***, 1.18***.
  - Composite EMBI: -0.00***.
  - Observations: 1,828; 1,356; 1,311; 1,382; 1,367; 1,382; 1,382.
  - Adjusted R2: 0.168, 0.191, 0.198, 0.164, 0.151, 0.155, 0.147.
- Table 4 (Dependent variable: log of total corporate equity issued):
  - Rating (S&P): 0.17**, 0.13.
  - GDP per head (PPP, log): 4.33**, 2.64, 3.89*, 4.46**, 4.54**.
  - Real Exchange Rate: -0.02***, -0.02**, -0.01, -0.03***, -0.02***.
  - Stock index (growth p.a.): 0.01*** across several columns.
  - Total Capital Flows to EMEs: 1.06***, 1.11***.
  - Composite EMBI: -0.00***.
  - Observations: 1,828; 1,600; 1,145; 1,138; 1,218; 1,219; 1,219.
  - Adjusted R2: 0.210, 0.216, 0.237, 0.259, 0.246, 0.247, 0.235.
- Table 5 (Sovereign Bond Spreads and Private Sector Access to Capital):
  - EMBI (Country Level) coefficients: -0.00***, -0.00***.
  - EMBI above 1000 (Dummy): -0.83**, -1.20**.
  - GDP per head (PPP, log): 5.10***, 5.68***, 3.48**, 4.11***.
  - Total Capital Flows to EMEs: 1.18***, 1.21***, 1.13***, 1.14***.
  - Political Stability (ICRG): 0.04*, 0.05**, 0.04, 0.04**.
  - Observations: 809 in each column.
  - Adjusted R2: 0.207, 0.198, 0.308, 0.305.
- Table 6 (The Role of Sovereign Market Access — Entire Sample and Sub-Sample of Crisis Periods):
  - Volume of Sovereign Debt Issuance (by country and quarter, log): 0.05*, 0.05*, 0.28***, 0.00, 0.04.
  - Rating (Inst. Investor): 0.01, 0.01, 0.04**, 0.04**, 0.05, 0.13**.
  - Real Exchange Rate examples: -0.02***, -0.02***, -0.04***, -0.04***, -11.27**, -22.79*, 0.12***.
  - Total Capital Flows to EMEs: 1.07***, 1.08***, 1.19***, 1.20***, -1.16, -0.58, 0.67.
  - Observations: 1,145; 1,145; 1,356; 1,356; 446; 872; 2.
  - Adjusted R2: 0.239, 0.238, 0.194, 0.193, 0.266, 0.203, 0.234.

### Robustness checks and extensions
- Additional explanatory variables added (Table 10, Annex) include domestic capital market measures (domestic credit/GDP and stock market capitalization/GDP), U.S. interest rates, trade openness, G-7 growth, and a measure of sudden stop episodes.
- Main results are little affected by inclusion of additional variables, notwithstanding reduced sample sizes due to missing values.
- Random effects estimations produce some differences (higher coefficients and significance for some variables, including rating levels on equity issuances), but Hausman tests indicate fixed-effects specifications that control for initial country conditions are more reliable.
- Subperiod analysis (post–2000 / 2001–07) shows:
  - Coefficients of domestic factors (ratings, inflation, GDP per capita) tend to become smaller and less significant.
  - Coefficients for external factors (composite EMBI spread, total emerging-market issuance volumes) remain the same and are more robust.
  - This is consistent with increased role of global factors in the post–2000 period of high global liquidity.

### Policy-relevant implications and recommendations
- Top-down spillovers:
  - Sovereign default risk transmits to private corporations’ access to external capital, imposing broad domestic costs of sovereign default beyond public-sector consequences.
- Negotiation behavior matters:
  - Avoid delays in debt renegotiations that can harm private sector access to credit.
  - Focus policy attention on government actions that influence renegotiation speed and clarity, since creditor holdouts and litigation show no negative spillovers to firms in these estimations.
- Sovereign risk management and ratings:
  - Reducing sovereign default risk and improving sovereign ratings and bond-market access can materially improve private firms’ access to external finance.
- IMF cooperation:
  - Cooperation with the IMF can have catalytic benefits in some cases, though empirical evidence on robustness is mixed.
- Market and macro strategy:
  - Governments interested in fostering development and growth of domestic private firms should avoid policies or rhetoric that negatively influence the country’s sovereign spreads and rating.
  - In view of possible rising sovereign risk during financial stress, heightened sovereign risk could further constrain future external financing of firms in emerging-market and developing countries.

### Data notes and scope (selected descriptive statistics preserved exactly)
- Micro data from 31 emerging economies were used.
- Analysis periods include 1980–2004 and 1993–2007 (with some economy inclusions from 1993 on only).
- Key control and explanatory variables used include: Institutional Investor Rating; S & P Rating (numerical); EMBI (country level); EMBI above 1000 (dummy); Inflation; Growth (real); GDP per head (PPP, log); Real Exchange Rate; Political Stability (ICRG); Stock Market Index (growth); VIX Volatility Index; High Yield Spread; Total Capital Flows to EMEs (log).
- Sample descriptive statistics examples (Table 8):
  - Institutional Investor Rating: Observ. 1828, Mean 49.62, Std. Dev. 16.37, Min 12.80, Max 91.80.
  - S & P Rating (numerical): Observ. 1600, Mean 13.21, Std. Dev. 4.09, Min 0.00, Max 22.00.
  - EMBI (country level): Observ. 861, Mean 492.67, Std. Dev. 781.72, Min 20.41, Max 6626.88.
  - EMBI above 1000 (dummy): Observ. 861, Mean 0.08, Std. Dev. 0.28, Min 0, Max 1.
  - Inflation: Observ. 1661, Mean 17.42, Std. Dev. 136.19, Min -5.87, Max 4448.81.
  - VIX Volatility Index: Observ. 1920, Mean 18.94, Std. Dev. 6.36, Min 10.42, Max 35.09.
  - Total Capital Flows to EMEs (log): Observ. 1888, Mean 11.04, Std. Dev. 0.66, Min 9.77, Max 12.61.

*Source: IMF Working Paper material — "9. Robustness Analysis on the Effect of Sovereign Defaults" (excerpt).*

### References .............................................................................................................

### _wp1010 - References .............................................................................................................

### Tables
- 1. The Impact of Sovereign Defaults on External Borrowing of the Private Sector ...............14
- 2. The Role of Debt-Crisis Characteristics ..............................................................................16
- 3. The Effect of Sovereign Ratings on Corporate External Borrowing ...................................22
- 4. The Effect of Sovereign Ratings on Equity Issuances .........................................................23
- 5. Sovereign Bond Spreads and Private Sector Access to Capital ...........................................24
- 6. The Role of Sovereign Market Access ................................................................................26

### Figures
- 1. Bond, Syndicated Loan, and Equity Issuance by Private Domestic firms in Emerging Markets, 1993–2007 ................................................................................................................29

### Appendix
- Appendix. Data and Descriptive Statistics...............................................................................29

### Appendix Tables
- 7. Economies Covered in the Analysis ....................................................................................31
- 8. Further Control Variables, 1993–2007 ................................................................................31

*Source: _wp1010 - References .............................................................................................................*

### 9. Robustness Analysis on the Effect of Sovereign Defaults...................................................32

### 9. Robustness Analysis on the Effect of Sovereign Defaults

### Scope and data
- Sample coverage and periods:
  - 31 major emerging-market economies (see Table 1 in the Annex).
  - Two main empirical windows: 1980–2004 (debt-crisis analysis) and 1993–2007 (spreads and ratings analysis).
- Dependent variables:
  - Volume of foreign corporate bonds and syndicated loans issued by private domestic corporations (aggregated from firm-level Dealogic data); measured as monthly percentage deviations from the 25-year country-specific mean in the 1980–2004 analysis.
  - Volume of equity securities issued by domestic corporations by country and quarter (Dealogic).
- Sovereign-risk measures:
  - Sovereign debt-crisis episodes and restructuring events (private-creditor focus).
  - Sovereign bond spreads (J.P. Morgan’s EMBI Global); distress threshold noted as spreads exceeding 1,000 basis points.
  - Sovereign ratings: Institutional Investor Rating (IIR) 0–100; Standard & Poor’s transformed to numerical 0 (selective default)–22 (AAA).
- Control variables and methodology:
  - Country and year fixed effects, robust errors clustered by country.
  - Large set of controls summarized by principal-component indices (international competitiveness; investment climate and monetary stability; financial development; long-run macro prospects; global supply of capital).
  - Controls for currency crises, systemic banking crises, natural disasters, real exchange rate, IMF programs (stand-by agreements), and global liquidity proxies (total emerging-market issuance, EMBI composite spread, VIX, Lehman High Yield spread).

### Main findings: sovereign defaults and corporate external credit (1980–2004)
- Sovereign defaults to private creditors cause a large contraction in private sector external borrowing:
  - Estimated drop in private-sector external borrowing of more than 40 percent, an effect that lasts for one year after the crisis ends.
- Comparison with prior work:
  - Effect sizes for defaults to private creditors are larger than those reported by Arteta and Hale (2008), who found a stronger adverse impact mainly for defaults to official (Paris Club) creditors.
  - Arteta and Hale (2008) reported a drop in foreign loans and bond issuance by domestic firms of more than 20 percent during defaults (for comparison).
- Debt-crisis characteristics and negotiation behavior:
  - Government-induced negotiation delays and outright refusals to negotiate (delays > three months or refusal to initiate talks) have additional negative effects on corporate borrowing; coefficient only weakly significant in some specifications.
  - Breakdowns caused by creditor actions (pre-restructuring litigation by creditors, holdouts/intercreditor disputes) show no significant negative spillovers on corporate borrowing in the estimations reported.
- Role of IMF programs:
  - IMF stand-by programs are associated with a positive effect on private sector credit during default episodes in some specifications, consistent with a catalytic role of IMF financing.
  - However, the positive IMF effect is not robust across all specifications (becomes insignificant when adding certain controls, e.g., a banking-crisis dummy); hence the IMF result should be considered with care.
- Time-variation and robustness:
  - The adverse effect of defaults and restructurings on private sector credit is stronger in the 1990s than in the 1980s.
  - Results are robust to using random-effects models, subperiods, inclusion of sudden-stop dummies, and alternative specifications; the main default effect remains highly significant and robust when the dependent variable is expressed in log form.

### Quantitative evidence from regressions (selected operational points)
- Table 1 (entire sample, 1980–2004) shows large negative coefficients on dummies for default/restructuring episodes with private creditors; coefficients imply percentage deviations in corporate credit volumes relative to nondefault years (examples shown in Table 1 panels).
- Lag structure:
  - Lags up to three years after restructuring agreements are included to capture post-crisis effects (1–12 months, 13–24 months, 25–36 months).

### Sovereign spreads, ratings, sovereign issuance, and corporate capital access (1993–2007)
- Sovereign bond spreads:
  - Higher sovereign bond spreads (EMBI Global) are associated with reduced corporate debt and equity issuance.
  - A sovereign is typically regarded as distressed when its foreign-bond spread over U.S. Treasuries exceeds 1,000 basis points.
- Sovereign ratings:
  - Higher IIR and S&P scores are strongly positively associated with larger volumes of private-sector external borrowing, even after controlling for fundamentals and when using rating residuals (rating variation unexplained by fundamentals).
  - IIR measure specifics: range 0–100; one standard deviation increase in IIR (16.4) translates into a sizable economic effect on corporate borrowing (example transformation yields an increase in the coefficient of 1.5 when scaled by the IIR standard deviation).
  - S&P ratings transformed to 0–22 are used as an additional validation check.
- Sovereign issuance and market access:
  - Constructed “no sovereign issuance” dummy (value 1 if no public or public-corporate external debt raised in a given quarter) to capture possible sovereign market closures that coincide with private market closures.
  - Periods of low or no sovereign issuance, higher spreads, and lower ratings are associated with reduced corporate issuance—consistent with sovereign market conditions affecting private access.
- Global liquidity and other external factors:
  - Total issuance volumes in emerging markets (sum of private bond, syndicated loan, and equity issuance across the 31 countries, logged) is a quantitatively important determinant of country-level corporate issuance—confirming the crucial role of global liquidity.
  - Other external risk proxies (EMBI composite spread, VIX, Lehman High Yield spread) are included to control for global risk appetite and are found to matter for issuance volumes.

### Additional empirical insights and policy-relevant implications
- Top-down spillovers:
  - Sovereign default risk transmits to private corporations’ access to external capital, imposing broad domestic costs of sovereign default beyond public-sector consequences.
- Negotiation behavior matters:
  - Government conduct during distress (delays, refusal to negotiate) is more consequential for domestic corporate access than creditor litigation or holdouts (which are not found to exert significant additional negative effects in the regressions).
- Policy implications suggested by the evidence:
  - Reducing sovereign default risk and improving sovereign ratings and bond-market access can materially improve private firms’ access to external finance.
  - Cooperation with the IMF can have catalytic benefits in some cases, though empirical evidence on robustness is mixed.
  - Reforming crisis-resolution procedures to limit government-induced delays could mitigate adverse spillovers to the private sector; empirical results highlight government negotiation behavior as relevant for corporate borrowing outcomes.

*Italic source: IMF Working Paper material — "9. Robustness Analysis on the Effect of Sovereign Defaults" (excerpt).*

### 0.27 and 0.31, respectively.

### _wp1010 - 0.27 and 0.31, respectively.

### Main empirical findings on sovereign risk and corporate access to capital
- An increase in sovereign risk has strong negative effects on the volume of corporate credit and equity issued in emerging-market countries.
- For 1980–2004, sovereign defaults have a strong negative impact on corporate external borrowing, leading to a drop of up to 40% after controlling for fundamentals and shocks. Defaults to private creditors have a stronger impact than defaults to official creditors.
- Debt-crisis characteristics matter:
  - Delays in debt renegotiations caused by government behavior have a negative spillover effect on corporate access to credit.
  - Creditor holdouts, intercreditor disputes, and creditor litigation against the sovereign appear to have no impact.
  - Weak indications that successful IMF programs have a positive effect on private sector access to credit during debt-crisis periods.
- For 1993–2007:
  - Deterioration in risk perceptions (higher sovereign bond spreads and lower sovereign ratings) has a strong negative impact on corporate external borrowing, particularly corporate external debt issuances.
  - The volume of equity issuances is closely linked to the level of country bond spreads but little affected by sovereign ratings.
- There is no evidence for close co-movement between public and corporate access to capital:
  - The volume of sovereign loans and bond issuances has no statistically robust impact on the volume of corporate credit and equity in either the full sample or the subsample of crisis episodes.
  - The dummy for the incidence of sovereign issuances by quarter is insignificant throughout.
  - Sovereign debt issuance is not an important predictor of the volume of external corporate capital raised in a given quarter.

### Quantitative effects and notable coefficients (selected results preserved exactly)
- In Table 3 (Dependent variable: log of total amount borrowed — corporate bonds and loans):
  - Rating (Residual) coefficients reported as 0.18***, 0.16***, 0.18***, 0.18*** in columns where shown.
  - Real Exchange Rate coefficients: -0.04***, -0.04***, -0.05***, -0.04***, -0.05***, -0.05***.
  - Total Capital Flows to EMEs: 1.19***, 1.06***, 1.18***.
  - Composite EMBI: -0.00*** (significant).
  - Observations: 1,828; 1,356; 1,311; 1,382; 1,367; 1,382; 1,382 (by column).
  - Adjusted R2 values include: 0.168, 0.191, 0.198, 0.164, 0.151, 0.155, 0.147.

- In Table 4 (Dependent variable: log of total corporate equity issued):
  - Rating (S&P) coefficients: 0.17** and 0.13 in columns shown.
  - GDP per head (PPP, log) coefficients include 4.33**, 2.64, 3.89*, 4.46**, 4.54**.
  - Real Exchange Rate coefficients: -0.02***, -0.02**, -0.01, -0.03***, -0.02***.
  - Stock index (growth p.a.): 0.01*** across several columns.
  - Total Capital Flows to EMEs: 1.06***, 1.11***.
  - Composite EMBI: -0.00*** (significant).
  - Observations: 1,828; 1,600; 1,145; 1,138; 1,218; 1,219; 1,219.
  - Adjusted R2 values include: 0.210, 0.216, 0.237, 0.259, 0.246, 0.247, 0.235.

- In Table 5 (Sovereign Bond Spreads and Private Sector Access to Capital):
  - EMBI (Country Level) coefficients for Bonds & Loans and Equity: -0.00***, -0.00*** (columns 1 and 2).
  - EMBI above 1000 (Dummy) coefficients: -0.83**, -1.20** (columns 1 and 2 for Bonds & Loans and Equity shown).
  - GDP per head (PPP, log) coefficients: 5.10***, 5.68***, 3.48**, 4.11*** (by column).
  - Total Capital Flows to EMEs: 1.18***, 1.21***, 1.13***, 1.14***.
  - Political Stability (ICRG): 0.04*, 0.05**, 0.04, 0.04** (by column).
  - Observations: 809 in each column.
  - Adjusted R2: 0.207, 0.198, 0.308, 0.305.

- In Table 6 (The Role of Sovereign Market Access — Entire Sample and Sub-Sample of Crisis Periods):
  - Volume of Sovereign Debt Issuance (by country and quarter, log): coefficients reported include 0.05*, 0.05*, 0.28***, 0.00, 0.04 (by column).
  - Rating (Inst. Investor) coefficient examples: 0.01, 0.01, 0.04**, 0.04**, 0.05, 0.13**.
  - Real Exchange Rate coefficients: -0.02***, -0.02***, -0.04***, -0.04***, -11.27**, -22.79*, 0.12*** (in crisis subsamples some coefficients extreme due to subsample).
  - Total Capital Flows to EMEs: 1.07***, 1.08***, 1.19***, 1.20***, -1.16, -0.58, 0.67.
  - Observations: 1,145; 1,145; 1,356; 1,356; 446; 872; 2 (columns as presented).
  - Adjusted R2 values include: 0.239, 0.238, 0.194, 0.193, 0.266, 0.203, 0.234.

### Robustness checks and extensions
- Additional explanatory variables added (Table 10, Annex) include domestic capital market measures (domestic credit/GDP and stock market capitalization/GDP), U.S. interest rates, trade openness, G-7 growth, and a measure of sudden stop episodes.
- Main results are little affected by inclusion of additional variables, notwithstanding reduced sample sizes due to missing values.
- Random effects estimations produce some differences (higher coefficients and significance for some variables, including rating levels on equity issuances), but Hausman tests indicate fixed-effects specifications that control for initial country conditions are more reliable.
- Subperiod analysis (post–2000 / 2001–07) shows:
  - Coefficients of domestic factors (ratings, inflation, GDP per capita) tend to become smaller and less significant.
  - Coefficients for external factors (composite EMBI spread, total emerging-market issuance volumes) remain the same and are more robust.
  - This is consistent with increased role of global factors in the post–2000 period of high global liquidity.

### Policy-relevant implications and recommendations
- Emerging-market governments should be aware that negative country-risk perceptions by international investors and rating agencies can have unintended adverse consequences for domestic corporations' external financing.
- Government behavior during debt renegotiations matters:
  - Avoid delays in debt renegotiations that can harm private sector access to credit.
  - Since creditor holdouts and litigation show no negative spillovers to firms, focus policy attention on government actions that influence renegotiation speed and clarity.
- Governments interested in fostering development and growth of domestic private firms should avoid policies or rhetoric that negatively influence the country’s sovereign spreads and rating.
- In view of possible rising sovereign risk during financial stress, heightened sovereign risk could further constrain future external financing of firms in emerging-market and developing countries.

### Data notes and scope
- Micro data from 31 emerging economies were used.
- Analysis periods include 1980–2004 and 1993–2007 (with some economy inclusions from 1993 on only).
- Key control and explanatory variables used include: Institutional Investor Rating; S & P Rating (numerical); EMBI (country level); EMBI above 1000 (dummy); Inflation; Growth (real); GDP per head (PPP, log); Real Exchange Rate; Political Stability (ICRG); Stock Market Index (growth); VIX Volatility Index; High Yield Spread; Total Capital Flows to EMEs (log).
- Sample descriptive statistics examples (Table 8):
  - Institutional Investor Rating: Observ. 1828, Mean 49.62, Std. Dev. 16.37, Min 12.80, Max 91.80.
  - S & P Rating (numerical): Observ. 1600, Mean 13.21, Std. Dev. 4.09, Min 0.00, Max 22.00.
  - EMBI (country level): Observ. 861, Mean 492.67, Std. Dev. 781.72, Min 20.41, Max 6626.88.
  - EMBI above 1000 (dummy): Observ. 861, Mean 0.08, Std. Dev. 0.28, Min 0, Max 1.
  - Inflation: Observ. 1661, Mean 17.42, Std. Dev. 136.19, Min -5.87, Max 4448.81.
  - VIX Volatility Index: Observ. 1920, Mean 18.94, Std. Dev. 6.36, Min 10.42, Max 35.09.
  - Total Capital Flows to EMEs (log): Observ. 1888, Mean 11.04, Std. Dev. 0.66, Min 9.77, Max 12.61.

*Source: IMF staff analysis as presented in the provided PDF content.*

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- Richmond, Christine, and Daniel Dias. 2008. “Duration of Capital Market Exclusion: Stylized Facts and Determining Factors.” Department of Economics, University of California, Los Angeles.
- Taylor, Mark P., and Lucio Sarno. 1997. “Capital Flows to Developing Countries: Long- and Short-Term Determinants.” World Bank Economic Review 11 (3): pp. 451–70.
- Portes, Richard, Helene Rey, and Yonghyup Oh. 2001. “Information and Capital Flows: The Determinants of Transactions in Financial Assets.” European Economic Review 45 (4): pp. 783–96.
- Mody, Ashoka, Mark P. Taylor, and Jung Yeon Kim. 2001. “Modelling Fundamentals for Forecasting Capital Flows to Emerging Markets.” International Journal of Finance & Economics 6 (3): pp.201–16.
- Montiel, Peter, and Carmen M. Reinhart. 1999. “Do Capital Controls and Macroeconomic Policies Influence the Volume and Composition of Capital Flows? Evidence from the 1990s.” Journal of International Money and Finance 18 (4): pp. 619–65.
- Portes, Richard, and Helene Rey. 2005. “The Determinants of Cross-Border Equity Flows.” Journal of International Economics 65 (2): pp. 269–96.
- Gelos, Gaston R., and Shang-Jin Wei. 2005. “Transparency and International Portfolio Holdings.” Journal of Finance 60 (6): pp. 2987–3020.
- Frankel, Jeffrey A., and Eduardo A. Cavallo, 2008, “Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality.” Journal of International Money and Finance 27 (8): pp. 1430–52.
- Levy-Yeyati, Eduardo. 2006. “Optimal Debt: On the Insurance Value of International Debt Flows to Developing Economies” IDB Working Paper 575, Inter-American Development Bank, Washington, DC.

### Sovereign debt, defaults, restructuring, and ratings
- Borensztein, Eduardo, Kevin Cowan, and Patricio Valenzuela, 2007, “Sovereign Ceilings ‘Lite’? The Impact of Sovereign Ratings on Corporate Ratings in Emerging Market Economies.” IMF Working Paper 07/75, International Monetary Fund, Washington, DC.
- Borensztein, Eduardo, and Ugo Panizza, 2008, “The Costs of Sovereign Default.” IMF Working Paper 08/238, International Monetary Fund, Washington, DC.
- Cruces, Juan, 2006, “Statistical Properties of Sovereign Credit Ratings.” Emerging Markets Review 7 (1): pp. 27–51.
- Cruces, Juan, 2007, “The Value of Pleasing International Creditors.” Universidad Torcuato di Tella Department of Economics, Buenos Aires.
- Enderlein, Henrik, Laura Müller, and Christoph Trebesch, 2008, “Debt Disputes: Measuring Government Coerciveness in Sovereign Debt Crises.” Hertie School of Governance, Berlin.
- Erce, Aitor, 2008, “A Structural Model of Sovereign Debt Issuance: Assessing the Role of Financial Factors.” Working Paper 0809, Bank of Spain, Madrid.
- Fuentes, Miguel, and Diego Saravia, 2006, “Sovereign Defaulters: Do International Capital Markets Punish Them?” Documentos de Trabajo 314, Instituto de Economía, Pontificia Universidad Católica de Chile, Santiago de Chile.
- Krueger, Anne. 2002. “A New Approach to Sovereign Debt Restructuring.” International Monetary Fund, Washington, DC.
- Medeiros, Carlos I., Parmeshwar Ramlogan, and Magdalena Polan. 2007. “A Primer on Sovereign Debt Buybacks and Swaps.” IMF Working Paper 07/58, International Monetary Fund, Washington, DC.
- Panizza, Ugo, Federico Sturzenegger, and Jeromin Zettelmeyer. 2009. “The Economics and Law of Sovereign Debt and Default.” Journal of Economic Literature 47(3): pp. 651-698.
- Pitchford, Rohan, and Mark L. J. Wright. 2008. “Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment.” Department of Economics, University of California, Los Angeles.
- Reinhart, Carmen M., and Kenneth S. Rogoff. 2004. “Serial Default and the ‘Paradox’ of Rich-to-Poor Capital Flows.” American Economic Review 94 (2): pp. 53–58.
- Reinhart, Carmen M., Kenneth S. Rogoff, and Miguel A Savastano. 2003. “Debt Intolerance.” Brookings Papers on Economic Activity 34 (1): pp. 1–70.
- Rose, Andrew K. 2005. “One Reason Countries Pay Their Debts: Renegotiation and International Trade.” Journal of Development Economics 77 (1): pp. 189–206.
- Sandleris, Guido. 2008. “Sovereign Defaults: Information, Investment and Credit.” Journal of International Economics 76 (2): pp. 267–75.
- Sturzenegger, Federico, and Jeromin Zettelmeyer. 2007. Debt Defaults and Lessons form a Decade of Crises. Cambridge, MA: MIT Press
- Trebesch, Christoph. 2008. “Delays in Sovereign Debt Restructurings. Should We Really Blame the Creditors?” Department of Economics, Free University of Berlin.
- Trebesch, Christoph. 2009. “The Cost of Aggressive Sovereign Debt Policies: How Much Is the Private Sector Affected?” IMF Working Paper 09/29, International Monetary Fund, Washington, DC.
- Levy-Yeyati, Eduardo, and Ugo Panizza. 2005. “The Elusive Costs of Sovereign Defaults.” RES Working Paper 4485, Inter-American Development Bank, Research Department, Washington, DC.
- Fuentes, Miguel, and Diego Saravia, 2006, “Sovereign Defaulters: Do International Capital Markets Punish Them?” Documentos de Trabajo 314, Instituto de Economía, Pontificia Universidad Católica de Chile, Santiago de Chile.
- Martinez, Jose Vicente, and Guido Sandleris. 2008. “Is it Punishment? Sovereign Defaults and the Decline in Trade.” Business School Working Paper 2008-01, Universidad Torcuato di Tella, Buenos Aires.
- Levy-Yeyati, Eduardo, Maria S. Martinez Peria, and Sergio L. Schmukler. 2004. “Market Discipline under Systemic Risk: Evidence from Bank Runs in Emerging Economies.” Policy Research Working Paper 3440, World Bank, Washington, DC.
- Fuentes, Miguel, and Diego Saravia, 2006, “Sovereign Defaulters: Do International Capital Markets Punish Them?” Documentos de Trabajo 314, Instituto de Economía, Pontificia Universidad Católica de Chile, Santiago de Chile.

### Sovereign and corporate credit risk, contingent claims, and ratings impact
- Cruces, Juan, 2006, “Statistical Properties of Sovereign Credit Ratings.” Emerging Markets Review 7 (1): pp. 27–51.
- Borensztein, Eduardo, Kevin Cowan, and Patricio Valenzuela, 2007, “Sovereign Ceilings ‘Lite’? The Impact of Sovereign Ratings on Corporate Ratings in Emerging Market Economies.” IMF Working Paper 07/75, International Monetary Fund, Washington, DC.
- Kaminsky, Graciela L., and Sergio L. Schmukler. 2002. “Emerging Market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?” World Bank Economic Review 16 (2): pp. 171–95.
- Kim, Suk-Joong, and Eliza Wu. 2008. “Sovereign Credit Ratings, Capital Flows and Financial Sector Development in Emerging Markets.” Emerging Markets Review 9 (1): pp. 17–39.
- Gapen, Michael, Dale Gray, Cheng Hoon Lim, and Yingbin Xiao, 2008, “Measuring and Analyzing Sovereign Risk with Contingent Claims.” IMF Staff Papers 55 (1): pp. 109–48.

### Banking crises, systemic risk, and financial development
- Laeven, Luc, and Fabian Valencia. 2008. “Systemic Banking Crises: A New Database.” IMF Working Paper 08/224, International Monetary Fund, Washington, DC.
- Levy-Yeyati, Eduardo, Maria S. Martinez Peria, and Sergio L. Schmukler. 2004. “Market Discipline under Systemic Risk: Evidence from Bank Runs in Emerging Economies.” Policy Research Working Paper 3440, World Bank, Washington, DC.
- Fostel, Ana, and John Geanakoplos, 2008, “Leverage Cycles and the Anxious Economy.” American Economic Review 98 (4): pp. 1211–44.
- Fostel, Ana, and Graciela L. Kaminsky, 2007, “Latin America’s Access to International Capital Markets: Good Behavior or Global Liquidity?” NBER Working Paper 13194, National Bureau of Economic Research, Cambridge, MA.
- Beck, Thorsten, Asli Demirgüç-Kunt, and Ross Levine, 2000, “A New Database on Financial Development and Structure.” World Bank Economic Review 14 (3): pp. 597–605.
- Mendoza, Enrique G., and Vivian Z. Yue. 2008. “A Solution to the Default Risk–Business Cycle Disconnect.” NBER Working Paper 13861, National Bureau of Economic Research, Cambridge, MA

### IMF role, programs, and international financial architecture
- Bordo, Michael, Ashoka Mody, and Oomes Nienke, 2004, “Keeping Capital Flowing: The Role of the IMF” International Finance 7 (3): pp. 421–50.
- Dreher, Axel, 2006, “IMF and Economic Growth: The Effects of Programs, Loans, and Compliance with Conditionality.” World Development 34 (5): pp. 769–78.
- Mody, Ashoka, and Diego Saravia. 2006. “Catalysing Private Capital Flows: Do IMF Programmes Work as Commitment Devices?” Economic Journal 116 (513): pp. 843–67.
- Pescatori, Andrea, and Amadou N. R. Sy. 2004. “Debt Crises and the Development of International Capital Markets.” IMF Working Paper 04/44, International Monetary Fund, Washington, DC.
- Medeiros, Carlos I., Parmeshwar Ramlogan, and Magdalena Polan. 2007. “A Primer on Sovereign Debt Buybacks and Swaps.” IMF Working Paper 07/58, International Monetary Fund, Washington, DC.
- Borensztein, Eduardo, Kevin Cowan, and Patricio Valenzuela, 2007, “Sovereign Ceilings ‘Lite’? The Impact of Sovereign Ratings on Corporate Ratings in Emerging Market Economies.” IMF Working Paper 07/75, International Monetary Fund, Washington, DC.
- Trebesch, Christoph. 2009. “The Cost of Aggressive Sovereign Debt Policies: How Much Is the Private Sector Affected?” IMF Working Paper 09/29, International Monetary Fund, Washington, DC.

### Modeling, empirical methods, and theoretical contributions
- Calvo, Guillermo A., Alejandro Izquierdo, and Luis-Fernando Mej a, 2008, “Systemic Sudden Stops: The Relevance of Balance-Sheet Effects and Financial Integration.” NBER Working Paper 14026, National Bureau of Economic Research, Cambridge, MA.
- Eichengreen, Barry, and Ashoka Mody, 2000, “Lending Booms, Reserves and the Sustainability of Short-Term Debt: Inferences from the Pricing of Syndicated Bank Loans.” Journal of Development Economics 63 (1) pp. 5–44.
- Fostel, Ana, and John Geanakoplos, 2008, “Leverage Cycles and the Anxious Economy.” American Economic Review 98 (4): pp. 1211–44.
- Mody, Ashoka, Mark P. Taylor, and Jung Yeon Kim. 2001. “Modelling Fundamentals for Forecasting Capital Flows to Emerging Markets.” International Journal of Finance & Economics 6 (3): pp.201–16.
- Erce, Aitor, 2008, “A Structural Model of Sovereign Debt Issuance: Assessing the Role of Financial Factors.” Working Paper 0809, Bank of Spain, Madrid.
- Pitchford, Rohan, and Mark L. J. Wright. 2008. “Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment.” Department of Economics, University of California, Los Angeles.
- Trebesch, Christoph. 2008. “Delays in Sovereign Debt Restructurings. Should We Really Blame the Creditors?” Department of Economics, Free University of Berlin.
- Enderlein, Henrik, Laura Müller, and Christoph Trebesch, 2008, “Debt Disputes: Measuring Government Coerciveness in Sovereign Debt Crises.” Hertie School of Governance, Berlin.

### Databases, datasets, and institutional reports
- Beck, Thorsten, Asli Demirgüç-Kunt, and Ross Levine, 2000, “A New Database on Financial Development and Structure.” World Bank Economic Review 14 (3): pp. 597–605.
- Laeven, Luc, and Fabian Valencia. 2008. “Systemic Banking Crises: A New Database.” IMF Working Paper 08/224, International Monetary Fund, Washington, DC.
- World Bank. 2002. Global Development Finance 2002: Financing the Poorest Countries. Washington, DC: World Bank.
- World Bank. 2003. Global Development Finance 2003: Striving for Stability in Development Finance. Washington, DC: World Bank.
- World Bank. 2007. Global Development Finance 2007: The Globalization of Corporate Finance in Developing Countries. Washington, DC: World Bank.
- Garibaldi, Pietro, Nada Mora, Sahay Ratna, and Jeromin Zettelmeyer. 2001. “What Moves Capital to Transition Economies?” IMF Staff Papers 48 (4): pp. 6.

*REFERENCES — _wp1010 - REFERENCES*

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