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COUNTRY RISK: Economic Policy, Contagion Effect or Political noise?

The opening of the capital account was one of the important structural reforms implemented by Argentina. This liberalization increased the linkage of the real economy with the changing conditions of the international financial markets. In particular, recent data show a clear relation between interest rates and the business cycle on the one hand, and sovereign spreads on the other. In order to understand better these linkages, it is necessary to analyze the determinants of these spreads also known as country risk. Using monthly data for the period 1994 to 1998, we find that this spread is explained by: 1) growth expectations, 2) fiscal deficits, 3) the debt service to export ratio and its growth rate, 4) contagion effects, 5) external shocks including movements of international interest rates, and 6) political noise. Based on these findings, we offer a discussion of some of the policies that should be implemented in order for the spreads to start declining and for the country to eventually reach an "investment grade" rating for its sovereign bonds.

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Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): IV (2001)
Issue (Month): (May)
Pages: 125-162

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Handle: RePEc:cem:jaecon:v:4:y:2001:n:1:p:125-162
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  1. Jorge C. Ávila, 1998. "Riesgo Argentino & Ciclo Económico," CEMA Working Papers: Serie Documentos de Trabajo. 133, Universidad del CEMA.
  2. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
  3. Barbone, Luca & Forni, Lorenzo, 1997. "Are markets learning? : behavior in the secondary market for Brady bonds," Policy Research Working Paper Series 1734, The World Bank.
  4. Edwards, Sebastian, 1986. "The pricing of bonds and bank loans in international markets : An empirical analysis of developing countries' foreign borrowing," European Economic Review, Elsevier, vol. 30(3), pages 565-589, June.
  5. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
  6. Reinhart, Carmen & Calvo, Sara, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?”," MPRA Paper 7124, University Library of Munich, Germany.
  7. 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.
  8. Miguel Kiguel & Gabriel A. Lopetegui, 1997. "Entendiendo el Riesgo País," CEMA Working Papers: Serie Documentos de Trabajo. 125, Universidad del CEMA.
  9. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  10. Hong G. Min, 1998. "Determinants of emerging market bond spread : do economic fundamentals matter?," Policy Research Working Paper Series 1899, The World Bank.
  11. Mohammad Hashem Pesaran & Yongcheol Shin & Richard J Smith, 1999. "Bounds Testing Approaches to the Analysis of Long Run Relationships," ESE Discussion Papers 46, Edinburgh School of Economics, University of Edinburgh.
  12. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
  13. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  14. Reisen, Helmut & von Maltzan, Julia, 1999. "Boom and Bust and Sovereign Ratings," International Finance, Wiley Blackwell, vol. 2(2), pages 273-93, July.
  15. International Monetary Fund, 1998. "The Relative Importance of Political and Economic Variables in Creditworthiness Ratings," IMF Working Papers 98/46, International Monetary Fund.
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