Advanced Search
MyIDEAS: Login to save this paper or follow this series

Who Saw Sovereign Debt Crises Coming?

Contents:

Author Info

  • Sebastián Nieto Parra

Abstract

This paper studies sovereign debt crises during the period 1993-2006 through the prism of the primary sovereign bond market. Two conclusions emerge. First, investment banks price sovereign default risk well before crises occur and before investors detect default risk. Between three and one years prior to the onset of a crisis, sovereign default risk countries paid to investment banks on average 1.10 per cent of the amount issued, close to double the average paid by emerging countries overall in the same period (0.56 per cent). In contrast, the level of sovereign bond spreads prior to crises is on average only slightly higher than for emerging countries (385 vs. 319 basis points), suggesting that investment banks have an information advantage with respect to investors and are the only parties compensated for the risk of sovereign debt crises. Second, investment banks’ behaviour differs depending on the type of sovereign debt crisis. Before crises, investment banks charged on average a higher underwriting fee to countries presenting public finances difficulties than to other sovereign debt crisis countries. The robustness of these results is verified through panel data analysis. The results are puzzling in that they indicate that valuable, publicly available information is not tracked by investors to help improve allocation of their emerging market fixed income assets. Cet article a pour objectif d’analyser les crises de dette souveraine pendant la période 1993-2006 à partir du marché primaire souverain. Deux principales conclusions ressortent de cette étude. Premièrement, les banques d’investissement évaluent les risques de défaut bien avant les crises et avant même que les investisseurs ne les anticipent. Un à trois ans avant le début de la crise, les pays qui présentent un risque de défaut souverain élevé commencent à verser, en moyenne, 1.10 pourcent des montants qu’ils émettent aux banques d’investissement, soit près du double du montant moyen que versent l’ensemble des pays émergents pendant la période de l’étude (0.56 pourcent). En revanche, ils bénéficient, avant le début des crises, des primes de risque qui ne sont que légèrement supérieures à celles du reste des pays émergents (385 contre 319 points de base). Ce résultat suggère que les banques d’investissement ont un avantage d’information par rapport aux investisseurs et qu’elles sont les seules à tirer profit du risque de crise de dette souveraine. Deuxièmement, le comportement des banques d’investissement diffère selon le type de crise. Avant les crises, elles prennent une commission de souscription plus élevée pour les pays qui présentent des difficultés en matière de finances publiques que pour le reste des pays qui ont connu une crise de dette souveraine. La robustesse de ces résultats est vérifiée à partir d’une analyse de données de panel. Ces résultats sont étonnants en ce qu’ils indiquent que les investisseurs n’utilisent pas l’information utile et publique à leur disposition pour améliorer l’allocation de leurs actifs en titres émis par les pays émergents. Mots clés: Information,

Download Info

If 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.
File URL: http://dx.doi.org/10.1787/227642504346
Download Restriction: no

Bibliographic Info

Paper provided by OECD Publishing in its series OECD Development Centre Working Papers with number 274.

as in new window
Length:
Date of creation: Nov 2008
Date of revision:
Handle: RePEc:oec:devaaa:274-en

Contact details of provider:
Postal: 2 rue Andre Pascal, 75775 Paris Cedex 16
Phone: 33-(0)-1-45 24 82 00
Fax: 33-(0)-1-45 24 85 00
Email:
Web page: http://www.oecd.org/Dev
More information through EDIRC

Related research

Keywords: information; sovereign debt crises; underwriter spread; primary bond market; commission de souscription; information; marché primaire souverain; crises de dette souveraine;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Carter, Richard B & Manaster, Steven, 1990. " Initial Public Offerings and Underwriter Reputation," Journal of Finance, American Finance Association, vol. 45(4), pages 1045-67, September.
  2. Lily Hua Fang, 2005. "Investment Bank Reputation and the Price and Quality of Underwriting Services," Journal of Finance, American Finance Association, vol. 60(6), pages 2729-2761, December.
  3. Lin, Hsiou-wei & McNichols, Maureen F., 1998. "Underwriting relationships, analysts' earnings forecasts and investment recommendations," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 101-127, February.
  4. West, Richard R., 1967. "Determinants of Underwriters' Spreads on Tax Exempt Bond Issues," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 2(03), pages 241-263, September.
  5. Kaminsky, Graciela L., 2006. "Currency crises: Are they all the same?," Journal of International Money and Finance, Elsevier, vol. 25(3), pages 503-527, April.
  6. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2003. "Government Finance in the Wake of Currency Crises," RCER Working Papers 501, University of Rochester - Center for Economic Research (RCER).
  7. Michaely, Roni & Womack, Kent L, 1999. "Conflict of Interest and the Credibility of Underwriter Analyst Recommendations," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 653-86.
  8. Sebastian Edwards, 1983. "LDC's Foreign Borrowing and Default Risk: An Empirical Investigation," NBER Working Papers 1172, National Bureau of Economic Research, Inc.
  9. Alexander Ljungqvist & Felicia Marston & William J. Wilhelm, 2006. "Competing for Securities Underwriting Mandates: Banking Relationships and Analyst Recommendations," Journal of Finance, American Finance Association, vol. 61(1), pages 301-340, 02.
  10. Lee, Inmoo & et al, 1996. "The Costs of Raising Capital," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 19(1), pages 59-74, Spring.
  11. Sebastián Nieto Parra & Javier Santiso, 2007. "The Usual Suspects: A Primer on Investment Banks' Recommendations and Emerging Markets," OECD Development Centre Working Papers 258, OECD Publishing.
  12. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  13. Jorge Braga de Macedo & Helmut Reisen, 2003. "Float in Order to Fix?: Lessons from Emerging Markets for EU Accession Countries," OECD Development Centre Working Papers 218, OECD Publishing.
  14. Paolo Manasse & Nouriel Roubini, 2005. "'Rules of Thumb' for Sovereign Debt Crises," International Finance 0509003, EconWPA.
  15. Arie Melnik & Doron Nissim, 2003. "Debt issue costs and issue characteristics in the Eurobond market," ICER Working Papers 09-2003, ICER - International Centre for Economic Research.
  16. Axel Schimmelpfennig & Nouriel Roubini & Paolo Manasse, 2003. "Predicting Sovereign Debt Crises," IMF Working Papers 03/221, International Monetary Fund.
  17. Gaston Gelos & Guido Sandleris & Ratna Sahay, 2004. "Sovereign Borrowing by Developing Countries," IMF Working Papers 04/221, International Monetary Fund.
  18. Miles Livingston & Robert E. Miller, 2000. "Investment Bank Reputation and the Underwriting of Nonconvertible Debt," Financial Management, Financial Management Association, vol. 29(2), Summer.
  19. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  20. Hsuan-Chi Chen & Jay R. Ritter, 2000. "The Seven Percent Solution," Journal of Finance, American Finance Association, vol. 55(3), pages 1105-1131, 06.
  21. repec:nbr:nberwo:13194 is not listed on IDEAS
  22. Bernhard Herz & Hui Tong, 2008. "Debt and Currency Crises-Complements or Substitutes?," Review of International Economics, Wiley Blackwell, vol. 16(5), pages 955-970, November.
  23. Daniel J. Bradley & Bradford D. Jordan & Jay R. Ritter, 2003. "The Quiet Period Goes out with a Bang," Journal of Finance, American Finance Association, vol. 58(1), pages 1-36, 02.
  24. Altinkilic, Oya & Hansen, Robert S, 2000. "Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 191-218.
  25. Eli M Remolona & Michela Scatigna & Eliza Wu, 2007. "Interpreting sovereign spreads," BIS Quarterly Review, Bank for International Settlements, March.
  26. Edwards, Sebastian, 1984. "LDC Foreign Borrowing and Default Risk: An Empirical Investigation, 1976-80," American Economic Review, American Economic Association, vol. 74(4), pages 726-34, September.
  27. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
  28. Andrea Pescatori & Amadou N R Sy, 2007. "Are Debt Crises Adequately Defined?," IMF Staff Papers, Palgrave Macmillan, vol. 54(2), pages 306-337, June.
  29. Marco Fioramanti, 2006. "Predicting Sovereign Debt Crises Using Artificial Neural Networks: A Comparative Approach," ISAE Working Papers 72, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
  30. Higgins, W. W. & Moore, B. J., 1980. "Market Structure versus Information Costs as Determinants of Underwriters' Spreads on Municipal Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(01), pages 85-97, March.
  31. Jochen R. Andritzky, 2004. "Implied Default Probabilities and Default Recovery Ratios: An Analysis of Argentine Eurobonds 2000-2002," Econometric Society 2004 Far Eastern Meetings 500, Econometric Society.
  32. David A. Grigorian, 2003. "On the Determinants of First-Time Sovereign Bond Issues," IMF Working Papers 03/184, International Monetary Fund.
  33. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
  34. Ciarlone, Alessio & Trebeschi, Giorgio, 2005. "Designing an early warning system for debt crises," Emerging Markets Review, Elsevier, vol. 6(4), pages 376-395, December.
  35. James, Christopher, 1992. " Relationship-Specific Assets and the Pricing of Underwriter Services," Journal of Finance, American Finance Association, vol. 47(5), pages 1865-85, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. R. Anton Braun & Tomoyuki Nakajima, 2011. "Making the Case for a Low Intertemporal Elasticity of Substitution," KIER Working Papers 788, Kyoto University, Institute of Economic Research.
  2. R. Anton Braun & Tomoyuki Nakajima, 2011. "Why Prices Don't Respond Sooner to a Prospective Sovereign Debt Crisis," KIER Working Papers 796, Kyoto University, Institute of Economic Research.
  3. Marc Flandreau & Juan H. Flores & Norbert Gaillard & Sebastián Nieto-Parra, 2009. "The End of Gatekeeping: Underwriters and the Quality of Sovereign Bond Markets, 1815–2007," Working Papers CEB 10-017.RS, ULB -- Universite Libre de Bruxelles.
  4. Marc Flandreau, Juan Flores, Norbert Gaillard, Sebasti‡n Nieto-Parra, 2011. "The Changing Role of Global Financial Brands in the Underwriting of Foreign Government Debt (1815-2010)," IHEID Working Papers 15-2011, Economics Section, The Graduate Institute of International Studies, revised 05 Dec 2011.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:oec:devaaa:274-en. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.