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Why do emerging economies borrow short term?

Listed author(s):
  • Broner, Fernando A.
  • Lorenzoni, Guido
  • Schmukler, Sergio L.

The authors argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long-term debt. They first present a model where the debt maturity structure is the outcome of a risk-sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a liquidity crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a tradeoff between safer long-term borrowing and cheaper short-term debt. Second, the authors construct a new database of sovereign bond prices and issuance. They show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting toward shorter maturities. This suggests that changes in bondholders'risk aversion are important to understand emerging market crises.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3389.

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Date of creation: 01 Sep 2004
Handle: RePEc:wbk:wbrwps:3389
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