Global Monetary Tightening: Emerging Markets Debt Dynamics and Fiscal Crises

IMF Working Papers, December 12, 2014

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Tightening global financial conditions can worsen emerging economies’ public debt dynamics through an increasing interest rate–growth differential.
The adverse effect is particularly pronounced if tightening is coupled with high global risk aversion.
Latin America and emerging Europe are the regions most likely to be adversely affected.
Historical evidence analyzed with a Poisson count model suggests:
- The frequency of sovereign debt crises increases in emerging economies at the early stage of U.S. monetary tightening cycles.
- Increases in sovereign debt crises occur at times when the term spread also rises.
The timing of elevated sovereign risk may be related to abrupt switches of expectations about the future course of policy in the early stages of tightening cycles.

Empirical analysis uses a Poisson count model to relate occurrences of sovereign debt crises to phases of U.S. monetary tightening and movements in the term spread.
Focus on dynamics of the interest rate–growth differential as the channel through which global financial conditions affect public debt trajectories.

Subjects: Bond yields, Financial crises, Financial institutions, Financial services, Monetary policy, Monetary tightening, Public debt, Yield curve
Keywords: Bond yields, debt crisis, Debt dynamics, debt fundamentals, EM debt dynamics, EM interest rates, emerging markets, EMS Interest Rate Growth Differential, Europe, Global, growth differential, Monetary tightening, non-resident debt, sovereign debt crisis, unconventional, WP, Yield curve