The opening of the capital account was one of the important structural reforms implemented by Argentina. This liberalization increased the linkage of the real economy with the changing conditions of the international financial markets. In particular, recent data show a clear relation between interest rates and the business cycle on the one hand, and sovereign spreads on the other. In order to understand better these linkages, it is necessary to analyze the determinants of these spreads also known as country risk. Using monthly data for the period 1994 to 1998, we find that this spread is explained by: 1) growth expectations, 2) fiscal deficits, 3) the debt service to export ratio and its growth rate, 4) contagion effects, 5) external shocks including movements of international interest rates, and 6) political noise. Based on these findings, we offer a discussion of some of the policies that should be implemented in order for the spreads to start declining and for the country to eventually reach an "investment grade" rating for its sovereign bonds.
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Find related papers by JEL classification: C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy F30 - International Economics - - International Finance - - - General
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