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Sovereign Defaults

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  • Bennett Sutton
  • Luis Catão

Abstract

While the relationship between volatility and credit risk is central to much of the literature on finance and banking, it has been largely neglected in empirical macro studies on sovereign defaults. This paper presents new econometric estimates for a panel of 25 emerging market countries over 1970-2001, breaking down aggregate volatility into its external and domestic policy components. We find that countries with historically higher macroeconomic volatility are more prone to default, and particularly so if part of this volatility is policy-induced. Reducing policy volatility thus appears to be key to improving a country''s credit standing.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/149.

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Length: 26
Date of creation: 01 Sep 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/149

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Keywords: Sovereign debt; Emerging markets; capital inflows; capital markets; sovereign defaults; international borrowing; debt service; short-term debt; capital controls; debt crises; capital flows; sovereign default; debt servicing; external debt; net capital; debt stock; capital control; ratio of debt; debt crisis; composition of capital inflows; net capital flows; access to capital markets; international lending; international capital markets; foreign capital flows; debt restructuring; debt servicing capacity; current account; access to international capital markets; foreign capital; capital inflow; capital mobility; access to international capital; ratio of debt service to exports; debt maturities; capital transactions; liquidity variables; international capital; capital flow; sovereign debt restructuring; imperfect capital markets; central bank; debt data; central banks; debt contracts; foreign loans; debt management; budget balances; net capital flow; crisis prevention; national debt; discount rates; international debt; total external debt; market debt; external shocks; public external debt; market bond; real effective exchange rate; debt obligations; debt service to exports; debt problems; ratio of debt service to export; currency crises; debt service to export;

References

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  1. Rose, Andrew K, 2002. "One Reason Countries Pay Their Debts: Renegotiation and International Trade," CEPR Discussion Papers 3157, C.E.P.R. Discussion Papers.
  2. Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Working papers 8813, Wisconsin Madison - Social Systems.
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  4. Kraay, Aart & Ventura, Jaume, 1998. "Comparative advantage and the cross-section of business cycles," Policy Research Working Paper Series 1948, The World Bank.
  5. Jose De Gregorio & Sebastian Edwards & Rodrigo O. Valdes, 2000. "Controls on Capital Inflows: Do they Work?," NBER Working Papers 7645, National Bureau of Economic Research, Inc.
  6. Donogh C. McDonald, 1982. "Debt Capacity and Developing Country Borrowing: A Survey of the Literature (Capacité d'endettement et emprunts des pays en développement: aperçu des études consacrées à cette question)," IMF Staff Papers, Palgrave Macmillan, vol. 29(4), pages 603-646, December.
  7. Eliana Cardoso & Ilan Goldfajn, 1998. "Capital Flows to Brazil: The Endogeneity of Capital Controls," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 161-202, March.
  8. Calvo, Guillermo A. & Vegh, Carlos A., 1999. "Inflation stabilization and bop crises in developing countries," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 24, pages 1531-1614 Elsevier.
  9. Reinhart, Carmen, 2002. "Default, currency crises, and sovereign credit ratings," MPRA Paper 13917, University Library of Munich, Germany.
  10. Peter H. Lindert & Peter J. Morton, 1989. "How Sovereign Debt Has Worked," NBER Chapters, in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages 39-106 National Bureau of Economic Research, Inc.
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  12. Enrica Detragiache & Antonio Spilimbergo, 2001. "Crises and Liquidity," IMF Working Papers 01/2, International Monetary Fund.
  13. Kenneth Kletzer, 1997. "Volatility, External Debt, and Fiscal Risk: Simulations of the Impact of Shocks on Fiscal Adjustment for Thirteen Latin American Countries," IDB Publications 6805, Inter-American Development Bank.
  14. Michael Gavin & Ricardo Hausmann & Roberto Perotti & Ernesto Talvi, 1996. "Managing Fiscal Policy in Latin America and the Caribbean: Volatility, Procyclicality, and Limited Creditworthiness," IDB Publications 6797, Inter-American Development Bank.
  15. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
  16. Feder, Gershon & Just, Richard E., 1977. "A study of debt servicing capacity applying logit analysis," Journal of Development Economics, Elsevier, vol. 4(1), pages 25-38, February.
  17. Agenor, Pierre-Richard & McDermott, C John & Prasad, Eswar S, 2000. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," World Bank Economic Review, World Bank Group, vol. 14(2), pages 251-85, May.
  18. Tamim Bayoumi & Barry Eichengreen, 1995. "Restraining Yourself: The Implications of Fiscal Rules for Economic Stabilization," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 32-48, March.
  19. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  20. Kenneth Kletzer, 1997. "Volatility, External Debt, and Fiscal Risk: Simulations of the Impact of Shocks on Fiscal Adjustment for Thirteen Latin American Countries," Research Department Publications 4092, Inter-American Development Bank, Research Department.
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