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The Impact of Political Risk on Sovereign Bond Spreads - Evidence from Latin America

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Author Info
Moser, Christoph
Abstract

Sovereign risk is defined as a country?s ability-to-pay and willingness-to-pay its debt. This paper examines how cabinet reshuffles affecting the ministry of finance or economics are perceived by sovereign bond holders in twelve Latin American countries from 1992 to 2005. We find that such political news instantaneously increases bond spreads. Furthermore, spreads trend significantly upward in the 40 days leading up to the minister change, before flattening out on a higher level in the 40 days thereafter. Evidence suggests that uncertainty about the future course of economic policy and the government?s willingness-to-pay increases refinancing costs for respective emerging markets. --

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Paper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Göttingen 2007 with number 24.

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Date of creation: 2007
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Handle: RePEc:zbw:gdec07:6804

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Keywords: political instability; country risk; bond spreads; Latin America;

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Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F30 - International Economics - - International Finance - - - General

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