Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets
IMF Working Papers, January 1, 2010
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- Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets
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Bibliographic details
- Authors: Udaibir S Das, Michael G. Papaioannou, Christoph Trebesch
- Published: January 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451961942.001
Summary and main findings
- Top down spillovers of sovereign default risk can have serious consequences for the private sector in emerging markets.
- The paper analyzes effects using firm-level data from 31 emerging market economies.
- The study assesses how sovereign risk affects corporate access to international capital markets in the form of external credit (loans and bond issuances) and equity issuances.
- Overall finding: sovereign default risk is a crucial determinant of private sector access to capital, whether external debt or equity.
- Crisis resolution patterns matter: defaults towards private creditors have stronger adverse consequences than defaults to official creditors.
- Time periods analyzed:
- Impact of sovereign debt crises during the 1980s and 1990s.
- The 1993 to 2007 period, using additional measures of sovereign risk—sovereign bond spreads and sovereign ratings—as explanatory variables.
Data, measures, and scope
- Firm-level data covering 31 emerging market economies.
- Capital access outcomes considered:
- External credit: loans and bond issuances.
- Equity issuances.
- Sovereign risk measures employed:
- Sovereign debt-crisis episodes (1980s and 1990s analysis).
- Sovereign bond spreads (1993 to 2007 analysis).
- Sovereign ratings (1993 to 2007 analysis).
Policy implications and interpretation
- Sovereign default risk transmission to the private sector reduces firms’ ability to obtain external finance via both debt and equity channels.
- The mode of crisis resolution influences private-sector outcomes; restructuring that imposes losses on private creditors is associated with stronger adverse effects on private access to capital than restructurings involving official creditors.
- Implicit recommendation: managing sovereign risk and designing crisis-resolution frameworks that limit adverse spillovers to the private sector can help preserve private access to international capital markets.