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Debt Crises and the Development of International Capital Markets

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  • Amadou N. R. Sy
  • Andrea Pescatori

Abstract

Crises on external sovereign debt are typically defined as defaults. Such a definition accurately captures debt-servicing difficulties in the 1980s, a period of numerous defaults on bank loans. However, defining defaults as debt crises is problematic for the 1990s, when sovereign bond markets emerged. In contrast to the 1980s, the 1990s are characterized by significant foreign debt-servicing difficulties but fewer sovereign defaults. In order to capture this evolution of debt markets, we define debt crises as events occurring when either a country defaults or its bond spreads are above a critical threshold. We find that our definition outperforms the default-based definition in capturing debt-servicing difficulties and, consequently, in fitting the post-1994 period. In particular, liquidity indicators are significant in explaining our definition of debt crises, while they do not play any role in explaining defaults after 1994.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/44.

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Length: 32
Date of creation: 01 Mar 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/44

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Keywords: Emerging markets; External debt; Debt service payments; bond; debt crises; bond spreads; sovereign bond; bonds; debt crisis; bond markets; currency crises; sovereign defaults; sovereign bonds; sovereign debt; debt servicing; short-term debt; overvaluation; debt service; foreign debt; international capital markets; international capital; bond market; market bond; financial markets; sovereign bond markets; bond prices; bond defaults; commercial creditors; commercial debt; sovereign default; exchange rate overvaluation; international bond; sovereign debt crisis; debt restructuring; international finance; financial institutions; real exchange rate overvaluation; public debt; short- term debt; currency crisis; emerging bond markets; international financial markets; international bond markets; sovereign bond market; short term debt; sovereign debt crises; bond contracts; bondholders; debt management; debt contracts; moral hazard; equity securities; outstanding bonds; external payment; denominated bonds; evolution of debt; foreign bonds; brady bonds; external debt service; central bank; international borrowing; access to international bond markets; sovereign debtor; sovereign borrowers; external volatility; emerging market bonds; bond default; market debt; debt outstanding; public debt management; bond issuers; debt obligations; official creditors; external obligations; government debt; current account; external obligation; secondary bond markets; stock returns; sovereign borrower; debt contract;

References

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  1. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  2. Enrica Detragiache & Antonio Spilimbergo, 2001. "Crises and Liquidity," IMF Working Papers 01/2, International Monetary Fund.
  3. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
  4. Alesina, A. & Prati, A. & Tabellini, G., 1989. "Public Confidence And Debt Management: A Model And A Case Study Of Italy," Papers 5, California Los Angeles - Applied Econometrics.
  5. 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.
  6. Axel Schimmelpfennig & Nouriel Roubini & Paolo Manasse, 2003. "Predicting Sovereign Debt Crises," IMF Working Papers 03/221, International Monetary Fund.
  7. Barry Eichengreen & Ashoka Mody, 1999. "Lending Booms, Reserves, and the Sustainability of Short-Term Debt: Inferences from the Pricing of Syndicated Bank Loans," NBER Working Papers 7113, National Bureau of Economic Research, Inc.
  8. Carmen M. Reinhart, 2002. "Default, Currency Crises, and Sovereign Credit Ratings," World Bank Economic Review, World Bank Group, vol. 16(2), pages 151-170, August.
  9. Jorge A. Chan-Lau, 2003. "Anticipating Credit Events Using Credit Default Swaps, with An Application to Sovereign Debt Crises," IMF Working Papers 03/106, International Monetary Fund.
  10. Catherine A. Pattillo & Andrew Berg, 1998. "Are Currency Crises Predictable? a Test," IMF Working Papers 98/154, International Monetary Fund.
  11. Pozo, Susan & Amuedo-Dorantes, Catalina, 2003. "Statistical distributions and the identification of currency crises," Journal of International Money and Finance, Elsevier, vol. 22(4), pages 591-609, August.
  12. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies," IMF Working Papers 99/88, International Monetary Fund.
  13. Giovanni Dell'Ariccia & Jeromin Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund.
  14. Amadou N. R. Sy, 2003. "Rating the Rating Agencies," IMF Working Papers 03/122, International Monetary Fund.
  15. Hu, Yen-Ting & Kiesel, Rudiger & Perraudin, William, 2002. "The estimation of transition matrices for sovereign credit ratings," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1383-1406, July.
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Citations

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Cited by:
  1. Udaibir S. Das & Michael G. Papaioannou & Christoph Trebesch, 2010. "Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets," IMF Working Papers 10/10, International Monetary Fund.
  2. Christoph Trebesch, 2009. "The Cost of Aggressive Sovereign Debt Policies," IMF Working Papers 09/29, International Monetary Fund.
  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. Hostland, Doug & Karam, Philippe, 2006. "Assessing debt sustainability in emerging market economies using stochastic simulation methods," Policy Research Working Paper Series 3821, The World Bank.
  5. Van Rijckeghem, Caroline & Weder di Mauro, Beatrice, 2004. "The Politics Of Debt Crises," CEPR Discussion Papers 4683, C.E.P.R. Discussion Papers.
  6. Dan OLTEANU, 2011. "A Survey On The Drivers And Mechanisms Of Financial Crises," Romanian Journal of Economics, Institute of National Economy, vol. 33(2(bis)(42), pages 73-100, December.
  7. Hostland, Doug, 2009. "Low-Income Countries' Access to Private Debt Markets," Policy Research Working Paper Series 4829, The World Bank.
  8. Tobias Knedlik & Gregor von Schweinitz, 2011. "Macroeconomic Imbalances as Indicators for Debt Crises in Europe," IWH Discussion Papers 12, Halle Institute for Economic Research.
  9. Pontines, Victor & Siregar, Reza, 2007. "The Yen, the US dollar, and the trade weighted basket of currencies: Does the choice of anchor currencies matter in identifying incidences of speculative attacks?," Japan and the World Economy, Elsevier, vol. 19(2), pages 214-235, March.
  10. 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.
  11. Dailami, Mansoor, 2010. "Sovereign debt distress and corporate spillover impacts," Policy Research Working Paper Series 5380, The World Bank.
  12. Dovern, Jonas & Gern, Klaus-Jürgen & Jannsen, Nils & Van Roye, Björn & Scheide, Joachim & Boysen-Hogrefe, Jens & Meier, Carsten-Patrick, 2010. "Weltkonjunktur im Frühjahr 2010," Kiel Discussion Papers 476/477, Kiel Institute for the World Economy (IfW).
  13. Bachellerie, A. & Couillault, B., 2005. "Public debt sustainability and crises in emerging market countries: a presentation of the concepts and diagnostic tools," Financial Stability Review, Banque de France, issue 6, pages 63-80, June.
  14. Caroline Rijckeghem & Beatrice Weder, 2009. "Political institutions and debt crises," Public Choice, Springer, vol. 138(3), pages 387-408, March.
  15. Manmohan Singh & Jochen R. Andritzky, 2006. "The Pricing of Credit Default Swaps During Distress," IMF Working Papers 06/254, International Monetary Fund.
  16. Dovern, Jonas & Gern, Klaus-Jürgen & Meier, Carsten-Patrick, 2010. "Schwache Konjunktur im Euroraum: Nur langsamer Abbau der Ungleichgewichte," Open Access Publications from Kiel Institute for the World Economy 45583, Kiel Institute for the World Economy (IfW).
  17. Kalotychou, Elena & Staikouras, Sotiris K., 2006. "An empirical investigation of the loan concentration risk in Latin America," Journal of Multinational Financial Management, Elsevier, vol. 16(4), pages 363-384, October.

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