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Convergence and Divergence of Sovereign Bond Spreads: Lessons From Latin America

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  • Martin Grandes

Abstract

Latin American sovereign bonds represent a significant share of the emerging debt class (50 per cent by early 2001) and so have considerably shaped the dynamics of this market. Recent financial turmoil, contagion episodes and investors’ renewed concerns with debt default call for a better understanding of sovereign bond pricing (spreads) and its determinants, either macro fundamentals, contagion or other external variables. This paper addresses two important questions not fully tackled in the existing literature: i) to what extent do permanent or transitory changes in fundamentals affect sovereign risk perception, i.e. default risk, once contagion is controlled for? ii) how can a relatively high and volatile spread be the cause of unsustainable public debt accumulation? In order to answer these questions, we estimate long-term structural equations to pin down country risk determinants for Argentina, Chile and Mexico, using a time series framework spanning 1994-2000. Unlike former ... Les obligations émises par les pouvoirs publics latino-américains représentent une proportion importante de la dette des pays émergents (50 pour cent début 2001) et influent donc de manière significative sur les dynamiques de ce marché. La récente tempête financière, les phénomènes de contagion et les inquiétudes nouvelles des investisseurs quant au risque de non-remboursement de la dette exigent d’approfondir les mécanismes de déterminations du cours des obligations souveraines (spreads) : paramètres macro-économiques fondamentaux, contagion ou autres variables externes. Ce Document technique examine deux points pas suffisamment traités jusque-là : i) dans quelle mesure les évolutions permanentes ou conjoncturelles des fondamentaux affectent-ils la perception du risque souverain, c’est-à-dire le risque de défaut de paiement, une fois tenu compte des phénomènes de contagion ? ; ii) comment des primes de risque relativement élevées et volatiles peuvent-elles provoquer l’accumulation ...

Suggested Citation

  • Martin Grandes, 2002. "Convergence and Divergence of Sovereign Bond Spreads: Lessons From Latin America," OECD Development Centre Working Papers 200, OECD Publishing.
  • Handle: RePEc:oec:devaaa:200-en
    DOI: 10.1787/822657710540
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    Cited by:

    1. Ratha, Dilip & De, Supriyo & Kurlat, Sergio, 2018. "Does governing law affect bond spreads?," Emerging Markets Review, Elsevier, vol. 36(C), pages 60-78.
    2. Sebastián Nieto-Parra, 2009. "Who Saw Sovereign Debt Crises Coming?," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2009), pages 125-169, August.
    3. 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.
    4. Moser, Christoph, 2007. "The Impact of Political Risk on Sovereign Bond Spreads - Evidence from Latin America," Proceedings of the German Development Economics Conference, Göttingen 2007 24, Verein für Socialpolitik, Research Committee Development Economics.
    5. repec:dau:papers:123456789/5486 is not listed on IDEAS

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