The Impact of Debt Sustainability and the Level of Debt on Emerging Markets Spreads
May 1, 2013
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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.
Subject: Debt sustainability, Emerging and frontier financial markets, External debt, Financial markets, Fiscal policy, Fiscal stance, Public debt
Keywords: debt benchmark, debt level, debt ratio, debt sustainability, Debt sustainability, debt sustainability measure, Emerging and frontier financial markets, emerging markets debt, expectations of fundamentals, financial market reaction, Fiscal stance, Global, market expectation, market-perceived debt, math, present discounted value, sovereign bond spread, Sovereign debt, sovereign spreads, spillover effect, world interest rate, WP
Pages:
31
Volume:
2013
DOI:
Issue:
093
Series:
Working Paper No. 2013/093
Stock No:
WPIEA2013093
ISBN:
9781484382769
ISSN:
1018-5941
