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COUNTRY RISK: Economic Policy, Contagion Effect or Political noise?

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  • Julio Nogués

    () (Former Executive Director, The World Bank)

  • Martín Grandes

    () (OCDE Development Centre and D.E.L.T.A)

Abstract

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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Bibliographic Info

Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): IV (2001)
Issue (Month): (May)
Pages: 125-162

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Handle: RePEc:cem:jaecon:v:4:y:2001:n:1:p:125-162

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  1. Miguel Kiguel & Gabriel A. Lopetegui, 1997. "Entendiendo el Riesgo País," CEMA Working Papers: Serie Documentos de Trabajo. 125, Universidad del CEMA.
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  14. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
  15. Carmen M. Reinhart & Sara Calvo, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?," Peterson Institute Press: Chapters, in: Guillermo A. Calvo & Morris Goldstein & Eduard Hochreiter (ed.), Private Capital Flows to Emerging Markets After the Mexican Crisis, pages 151-171 Peterson Institute for International Economics.
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Cited by:
  1. Paul Bergin & Oscar Jorda, 2001. "Measuring Monetary Policy Interdependence," Working Papers 69, University of California, Davis, Department of Economics.
  2. Peter Rowland & José Luis Torres Trespalacios, 2004. "Determinants Of Spread And Creditworthiness For Emerging Market Sovereign Debt: A Panel Data Study," BORRADORES DE ECONOMIA 002337, BANCO DE LA REPÚBLICA.
  3. Martin Grandes & Helmut Reisen, 2003. "Hard Peg versus Soft Float. A Tale of Two Latin-American Countries," Revue économique, Presses de Sciences-Po, vol. 54(5), pages 1057-1090.
  4. Martín Grandes, 2007. "The Determinants of Sovereign Bond Spreads: Theory and Facts From Latin America," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 44(130), pages 151-181.

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