## Does Gross or Net Debt Matter More for Emerging Market Spreads?

_IMF Working Papers, December 22, 2016_

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## Bibliographic details
- Authors: Metodij Hadzi-Vaskov, Luca A Ricci
- Published: December 22, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475563108.001

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### Research question and motivation
- Investigates whether gross or net debt matters more for long-term sovereign bond spreads in emerging market economies (EMEs).
- Motivated by the borrowing cost implications of public asset–liability management decisions (e.g. using assets to lower debt).

### Data and empirical approach
- Sample: emerging market economies (EMEs) over the period 1998–2014.
- Outcome studied: long-term sovereign bond spreads.
- Empirical strategy compares effects of gross debt and public assets on spreads and examines robustness across alternative specifications and subgroups of EMEs.

### Key empirical findings
- Both gross debt and assets have a significant impact on long-term sovereign bond spreads in emerging markets.
- Effects of gross debt and assets are roughly offsetting: coefficients of opposite sign and similar magnitude.
- Net debt appears more appropriate than gross debt when evaluating the impact of indebtedness on spreads.
- Quantitative result: an increase in net debt by 10 percentage points of GDP implies an increase in the spread by 100–120 basis points.
- The effect of net debt on spreads is larger during periods of domestic distress.
- The key results are quite robust to alternative specifications and subgroups of EMEs.

### Policy implications and interpretation
- Asset–liability management that uses public assets to lower indebtedness can materially affect borrowing costs; net debt should be used to evaluate such effects.
- Policymakers in EMEs should consider net debt metrics when assessing sovereign risk and cost of borrowing, especially during episodes of domestic distress.

*IMF Working Paper No. 2016/246 (2016), Metodij Hadzi-Vaskov and Luca A Ricci.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/does-gross-or-net-debt-matter-more-for-emerging-market-spreads-44491_