Estimating Default Probabilities of Emerging Market Sovereigns: A New Look at a Not-So-New Literature
AbstractThe January 2001 proposal for a New Basel Capital Accord has renewed the interest in obtaining default probabilities for various types of borrowers. This paper uses a panel logit model to estimate default probabilities of 78 emerging market countries (1984-97) as a function of a set of economic and political variables. These sovereign default probabilities are then compared with the default rates associated with the sovereign credit ratings of the two major rating agencies, Moody's Investors Service and Standard & Poor's. Unlike the existing literature, we define the dependent variable ("sovereign default") differently, using the changes in the levels of debt arrears and amounts rescheduled as criteria instead of the levels themselves. The paper finds, first, that the most important determinants of sovereign default appear to be the past repayment performance of a country, the cost of international credit, the volatility of per capita income, political risk, and exchange rate misalignments. Second, the comparison of estimated default probabilities with rating agencies' default rates shows that the latter seem to considerably underestimate sovereign default risk. In other words, sovereign credit ratings appear to be too high on average.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 06-2002.
Length: 55 pages
Date of creation: Apr 2002
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-11-18 (All new papers)
- NEP-FIN-2002-11-18 (Finance)
- NEP-NET-2002-11-18 (Network Economics)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Gabriel Cuadra & Horacio Sapriza, 2006. "Sovereign Default, Terms of Trade and Interest Rates in Emerging Markets," Working Papers 2006-01, Banco de México.
- Ricardo Nunes & Horacio Sapriza & Ceyhun Bora Durdu, 2010.
"News and sovereign default risk in small open economies,"
2010 Meeting Papers
1224, Society for Economic Dynamics.
- C. Bora Durdu & Ricardo Nunes & Horacio Sapriza, 2013. "News and Sovereign Default Risk in Small Open Economies," KoÃ§ University-TUSIAD Economic Research Forum Working Papers 1309, Koc University-TUSIAD Economic Research Forum.
- Ceyhun Bora Durdu & Ricardo Nunes & Horacio Sapriza, 2010. "News and sovereign default risk in small open economies," International Finance Discussion Papers 997, Board of Governors of the Federal Reserve System (U.S.).
- Ricardo Nunes & Horacio Sapriza & Bora Durdu, 2011. "News and sovereign default risk in small open economies," 2011 Meeting Papers 1355, Society for Economic Dynamics.
- De Paoli, Bianca & Hoggarth, Glenn & Saporta, Victoria, 2009. "Output costs of sovereign crises: some empirical estimates," Bank of England working papers 362, Bank of England.
- Gabriel Cuadra & Juan Sanchez & Horacio Sapriza, 2010.
"Fiscal Policy and Default Risk in Emerging Markets,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 452-469, April.
- Juan M. Sanchez & Horacio Sapriza & Gabriel Cuadra, 2009. "Fiscal Policy and Default Risk in Emerging Markets," 2009 Meeting Papers 701, Society for Economic Dynamics.
- Gabriel Cuadra & Horacio Sapriza, 2007. "Fiscal Policy and Default Risk in Emerging Markets," Working Papers 2007-03, Banco de México.
- Gabriel Cuadra & Juan M. Sanchez & Horacio Sapriza, 2009. "Fiscal policy and default risk in emerging markets," Working Paper 09-01, Federal Reserve Bank of Richmond.
- Zeaiter, Hussein Zeaiter, 2013. "Sovereign Debt Defaults: Evidence using Extreme bounds Analysis," Working Papers 32/2013, Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE).
- Hans Genberg & Astrit Sulstarova, 2004.
"Macroeconomic volatility, debt dynamics, and sovereign interest rate spreads,"
IHEID Working Papers
03-2004, Economics Section, The Graduate Institute of International Studies.
- Genberg, Hans & Sulstarova, Astrit, 2008. "Macroeconomic volatility, debt dynamics, and sovereign interest rate spreads," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 26-39, February.
- Hans Genberg & Astrit Sulstarova, 2005. "Macroeconomic Volatility, Debt Dynamics, and Sovereign Interest Rate Spreads," Working Papers 182005, Hong Kong Institute for Monetary Research.
- Eicher, Theo S. & Schubert, Stefan F. & Turnovsky, Stephen J., 2008. "Dynamic effects of terms of trade shocks: The impact on debt and growth," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 876-896, October.
- Cuadra, Gabriel & Sapriza, Horacio, 2008.
"Sovereign default, interest rates and political uncertainty in emerging markets,"
Journal of International Economics,
Elsevier, vol. 76(1), pages 78-88, September.
- Gabriel Cuadra & Horacio Sapriza, 2006. "Sovereign Default, Interest Rates and Political Uncertainty in Emerging Markets," Working Papers 2006-02, Banco de México.
- Amadou N. R. Sy, 2003.
"Rating the Rating Agencies: Anticipating Currency Crises or Debt Crises,"
IMF Working Papers
03/122, International Monetary Fund.
- Sy, Amadou N.R., 2004. "Rating the rating agencies: Anticipating currency crises or debt crises?," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2845-2867, November.
- Fuertes, Ana-Maria & Kalotychou, Elena, 2006. "Early warning systems for sovereign debt crises: The role of heterogeneity," Computational Statistics & Data Analysis, Elsevier, vol. 51(2), pages 1420-1441, November.
- Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2007. "The economics of sovereign defaults," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 163-187.
- Marcel Peter & MartÃn Grandes, 2005. "How Important Is Sovereign Risk in Determining Corporate Default Premia? The Case of South Africa," IMF Working Papers 05/217, International Monetary Fund.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Johannes Eugster).
If references are entirely missing, you can add them using this form.