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Estimating Default Probabilities of Emerging Market Sovereigns: A New Look at a Not-So-New Literature

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  • Marcel Peter

    ()
    (IUHEI)

Abstract

The 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.

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Bibliographic Info

Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 06-2002.

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Length: 55 pages
Date of creation: Apr 2002
Date of revision:
Handle: RePEc:gii:giihei:heiwp06-2002

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Cited by:
  1. 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.
  2. Ana-Maria Fuertes & Elena Kalotychou, 2004. "Elements in the Design of an Early Warning System for Sovereign Default," Computing in Economics and Finance 2004 231, Society for Computational Economics.
  3. 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.
  4. 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.
  5. Marcel Peter & Martín 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.
  6. 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.
  7. 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.
  8. 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.
  9. Gabriel Cuadra & Horacio Sapriza, 2006. "Sovereign Default, Interest Rates and Political Uncertainty in Emerging Markets," Working Papers 2006-02, Banco de México.
  10. 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).
  11. Gabriel Cuadra & Horacio Sapriza, 2006. "Sovereign Default, Terms of Trade and Interest Rates in Emerging Markets," Working Papers 2006-01, Banco de México.
  12. 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.
  13. 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.

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