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Why Do Emerging Economies Borrow Short Term?

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  • Broner, Fernando A
  • Lorenzoni, Guido
  • Schmukler, Sergio

Abstract

We argue that emerging economies borrow short term due to the high risk premium charged by bondholders on long-term debt. First, we present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a rollover crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a trade-off between safer long-term debt and cheaper short-term debt. Second, we construct a new database of sovereign bond prices and issuance. We show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting towards shorter maturities. The evidence suggests that international investors' time-varying risk aversion is crucial to understand the debt structure in emerging economies.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6249.

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Date of creation: Apr 2007
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Handle: RePEc:cpr:ceprdp:6249

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Keywords: emerging market debt; financial crises; investor risk aversion; maturity structure; risk premium; term premium;

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