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The evolution and determinants of emerging markets credit spreads in the 1990s

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  • Steven B. Kamin

    (U.S. Board of Governors of the Federal Reserve - Division of International Finance (IFDP))

  • K von Kleist
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    Abstract

    This paper develops measures of emerging market credit spreads for the 1990s, based on data on new bond issues and bank loans, that cover a broader range of borrowers than the Brady bond spreads most commonly used to date. These measures are used to identify the impacts of credit ratings, maturity and currency denomination on spreads. We find important regional differences in spreads across the developing world, even after controlling for risk and maturity. We also identify the evolution of spreads during the 1990s up until the advent of the Asian financial crisis, holding other determinants constant, and find that emerging market spreads declined by more than can be explained by improvements in risk. However, for emerging market instruments with relatively favourable credit ratings, trends in spreads differed considerably from those experienced by Brady bonds. Finally, and in contrast to much market commentary, we find that variations in industrial country short-term interest rates explain relatively little of the decline in emerging market bond spreads. Longer-term trends, perhaps reflecting globalisation, along with the temporary impact of the Mexican financial crisis, may have been more important factors in the behaviour of emerging market spreads.

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    Bibliographic Info

    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 68.

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    Length: 40 pages
    Date of creation: May 1999
    Date of revision:
    Handle: RePEc:bis:biswps:68

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    1. Demirguc-Kunt, Asli & Detragiache, Enrica, 1994. "Interest rates, official lending, and the debt crisis: A reassessment," Journal of Development Economics, Elsevier, vol. 44(2), pages 263-285, August.
    2. Guillermo LarraĆ­n & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
    3. Hong G. Min, 1998. "Determinants of emerging market bond spread : do economic fundamentals matter?," Policy Research Working Paper Series 1899, The World Bank.
    4. Ozler, Sule, 1992. "The evolution of credit terms : An empirical study of commercial bank lending to developing countries," Journal of Development Economics, Elsevier, vol. 38(1), pages 79-97, January.
    5. Richard Cantor & Frank Packer, 1995. "Sovereign credit ratings," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(Jun).
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