Global Monetary Conditions versus Country-Specific Factors in the Determination of Emerging Market Debt Spreads
AbstractWe offer evidence in this paper that US interest rate policy has an important influence in the determination of credit spreads on emerging market bonds over US benchmark treasuries, and therefore on their cost of capital. Our analysis improves upon the existing literature and understanding, by addressing the dynamics of market expectations in shaping views on interest rate and monetary policy changes, and by recognizing non-linearities in the link between US interest rates and emerging market bond spreads, as the level of interest rates affects the market's perceived probability of default and the solvency of emerging market borrowers. For a country with a moderate level of debt, repayment prospects would remain good in the face of an increase in US interest rates, so there would be little increase in spreads. A country close to the borderline of solvency would face a steeper increase in the spreads. Simulations of a 200 basis points (bps) increase in US short-term interest rates (ignoring any change in the US 10 year Treasury rate) show an increase in emerging market spreads ranging from 6 bps to 65 bps, depending on debt/GDP ratios.
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Bibliographic InfoPaper provided by EconWPA in its series International Finance with number 0506003.
Length: 32 pages
Date of creation: 06 Jun 2005
Date of revision:
Note: Type of Document - pdf; pages: 32
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emerging market spreads; currency crises; global monetary conditions;
Other versions of this item:
- Dailami, Mansoor & Masson, Paul R. & Padou, Jean Jose, 2008. "Global monetary conditions versus country-specific factors in the determination of emerging market debt spreads," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1325-1336, December.
- Dailami, Mansoor & Masson, Paul R. & Padou, Jean Jose, 2005. "Global monetary conditions versus country-specific factors in the determination of emerging market debt spreads," Policy Research Working Paper Series 3626, The World Bank.
- F3 - International Economics - - International Finance
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-06-14 (All new papers)
- NEP-FMK-2005-06-14 (Financial Markets)
- NEP-MON-2005-06-14 (Monetary Economics)
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