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Convergence and Divergence of Sovereign Bond Spreads: Lessons From Latin America

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  • Martin Grandes
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    Abstract

    Latin American sovereign bonds represent a significant share of the emerging debt class (50 per cent by early 2001) and so have considerably shaped the dynamics of this market. Recent financial turmoil, contagion episodes and investors’ renewed concerns with debt default call for a better understanding of sovereign bond pricing (spreads) and its determinants, either macro fundamentals, contagion or other external variables. This paper addresses two important questions not fully tackled in the existing literature: i) to what extent do permanent or transitory changes in fundamentals affect sovereign risk perception, i.e. default risk, once contagion is controlled for? ii) how can a relatively high and volatile spread be the cause of unsustainable public debt accumulation? In order to answer these questions, we estimate long-term structural equations to pin down country risk determinants for Argentina, Chile and Mexico, using a time series framework spanning 1994-2000. Unlike former ... Les obligations émises par les pouvoirs publics latino-américains représentent une proportion importante de la dette des pays émergents (50 pour cent début 2001) et influent donc de manière significative sur les dynamiques de ce marché. La récente tempête financière, les phénomènes de contagion et les inquiétudes nouvelles des investisseurs quant au risque de non-remboursement de la dette exigent d’approfondir les mécanismes de déterminations du cours des obligations souveraines ( spreads ) : paramètres macro-économiques fondamentaux, contagion ou autres variables externes. Ce Document technique examine deux points pas suffisamment traités jusque-là : i) dans quelle mesure les évolutions permanentes ou conjoncturelles des fondamentaux affectent-ils la perception du risque souverain, c’est-à-dire le risque de défaut de paiement, une fois tenu compte des phénomènes de contagion ? ; ii) comment des primes de risque relativement élevées et volatiles peuvent-elles provoquer l’accumulation ...

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    File URL: http://dx.doi.org/10.1787/822657710540
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    Bibliographic Info

    Paper provided by OECD Publishing in its series OECD Development Centre Working Papers with number 200.

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    Date of creation: Oct 2002
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    Handle: RePEc:oec:devaaa:200-en

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    Cited by:
    1. Quenan, Carlos & Torija-Zane, Edgardo, 2007. "Changing the focus of the exchange rate regimes debate in emerging economies : causes and scope of de-dollarization in Latin America," Economics Papers from University Paris Dauphine 123456789/5486, Paris Dauphine University.

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