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Global Monetary Conditions versus Country-Specific Factors in the Determination of Emerging Market Debt Spreads

Author

Listed:
  • Mansoor Dailami

    (World Bank)

  • Paul Masson

    (Rotman School of Management, University of Toronto)

  • Jean Jose Padou

    (University of Toronto)

Abstract

We offer evidence in this paper that US interest rate policy has an important influence in the determination of credit spreads on emerging market bonds over US benchmark treasuries, and therefore on their cost of capital. Our analysis improves upon the existing literature and understanding, by addressing the dynamics of market expectations in shaping views on interest rate and monetary policy changes, and by recognizing non-linearities in the link between US interest rates and emerging market bond spreads, as the level of interest rates affects the market's perceived probability of default and the solvency of emerging market borrowers. For a country with a moderate level of debt, repayment prospects would remain good in the face of an increase in US interest rates, so there would be little increase in spreads. A country close to the borderline of solvency would face a steeper increase in the spreads. Simulations of a 200 basis points (bps) increase in US short-term interest rates (ignoring any change in the US 10 year Treasury rate) show an increase in emerging market spreads ranging from 6 bps to 65 bps, depending on debt/GDP ratios.

Suggested Citation

  • Mansoor Dailami & Paul Masson & Jean Jose Padou, 2005. "Global Monetary Conditions versus Country-Specific Factors in the Determination of Emerging Market Debt Spreads," International Finance 0506003, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0506003
    Note: Type of Document - pdf; pages: 32
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    emerging market spreads; currency crises; global monetary conditions;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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