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Debt levels, debt composition, and sovereign spreads in emerging and advanced economies

  • Salvatore Dell’Erba
  • Ricardo Hausmann
  • Ugo Panizza

This paper studies the relationship between sovereign spreads and the interaction between debt composition and debt levels in advanced and emerging market countries. It finds that in emerging market countries there is a significant correlation between spreads and debt levels. This correlation, however, is not statistically significant in countries where most public debt is denominated in local currency. In advanced economies, the magnitude of the correlation between debt levels and spreads is about one-fifth of the corresponding correlation for emerging market economies. In eurozone countries, however, the correlation between spreads and debt ratios is similar to that of emerging market countries. The paper also shows that the financial crisis amplified the relationship between spreads and debt levels within the eurozone but had no effect on the relationship between spreads and debt in stand-alone countries. Finally, the paper shows that the relationship between debt levels and spreads is amplified by the presence of large net foreign liabilities. This amplifying effect of net foreign liabilities is larger in the eurozone than in stand-alone advanced economies. The paper concludes that debt composition matters and corroborates the original sin hypothesis that, rather than being a mere reflection of institutional weakness, the presence of foreign currency debt increases financial fragility and leads to suboptimal macroeconomic policies. Copyright 2013, Oxford University Press.

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Article provided by Oxford University Press in its journal Oxford Review Of Economic Policy.

Volume (Year): 29 (2013)
Issue (Month): 3 (AUTUMN)
Pages: 518-547

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Handle: RePEc:oup:oxford:v:29:y:2013:i:3:p:518-547
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  1. Morris Goldstein & Philip Turner, 2004. "Controlling Currency Mismatches in Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 373, March.
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  12. Ugo Panizza & Andrea Filippo Presbitero, 2012. "Public Debt and Economic Growth: Is There a Causal Effect?," Mo.Fi.R. Working Papers 65, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
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  15. Nazim Belhocine & Salvatore Dell'Erba, 2013. "The Impact of Debt Sustainability and the Level of Debt on Emerging Markets Spreads," IMF Working Papers 13/93, International Monetary Fund.
  16. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  17. Hausmann Ricardo & Panizza Ugo, 2011. "Redemption or Abstinence? Original Sin, Currency Mismatches and Counter Cyclical Policies in the New Millennium," Journal of Globalization and Development, De Gruyter, vol. 2(1), pages 1-35, August.
  18. Lorenzo Codogno & Carlo Favero & Alessandro Missale, 2003. "Yield spreads on EMU government bonds," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 503-532, October.
  19. Thomas Herndon & Michael Ash & Robert Pollin, 2013. "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogo ff," Working Papers wp322, Political Economy Research Institute, University of Massachusetts at Amherst.
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