How Important Is Sovereign Risk in Determining Corporate Default Premia? The Case of South Africa

November 1, 2005

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Format: Chicago

Marcel Peter, and Martín Grandes. How Important Is Sovereign Risk in Determining Corporate Default Premia? The Case of South Africa, (USA: International Monetary Fund, 2005) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper analyzes and quantifies the importance of sovereign risk in determining corporate default premia (yield spreads). It also investigates the extent to which the practice by rating agencies and banks of not rating companies higher than their sovereign ("country or sovereign ceiling") is reflected in the yields of South African local-currency-denominated corporate bonds. The main findings are: (i) sovereign risk appears to be the single most important determinant of corporate default premia in South Africa; (ii) the sovereign ceiling (in local-currency terms) does not apply in the spreads of the industrial multinational companies in the sample; and (iii) consistent with rating agency policy, however, the sovereign ceiling appears to apply in the spreads of most financial companies in the sample.

Subject: Bonds, Corporate bonds, Debt default, Emerging and frontier financial markets, Sovereign bonds

Keywords: Coupon bond, Default probability, Emerging market, Interest rate, Risk premium, WP

Publication Details

Pages:

64
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/217
Stock No:

WPIEA2005217
ISBN:

9781451862362
ISSN:

1018-5941

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