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Author:
Mr. Luis Catão
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and
Rui Mano
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Series:
IMF Working Papers
Volume/Issue:
Volume 2015: Issue 167
Language:
English
Publication Date:
21 Jul 2015
DOI:
https://doi.org/10.5089/9781513523507.001
ISBN:
9781513523507
ISSN:
1018-5941
Pages:
57
Keywords:
WP; default premium; interest rate; Sovereign Debt; Country Risk; Interest Rate Spread; Haircut; Emerging Markets; market re-entry; settlement dummy; repayment decision; market exclusion; DP estimate; default premium variable; market access; exclusion spell; Debt settlement; Credit; Emerging and frontier financial markets; Debt default; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We re-assess the view that sovereigns with a history of default are charged only a small and/or short-lived premium on the interest rate warranted by observed fundamentals. Our reassessment uses a metric of such a “default premium” (DP) that is consistent with asymmetric information models and nests previous metrics, and applies it to a much broader dataset relative to earlier studies. We find a sizeable and persistent DP: in 1870-1938, it averaged 250 bps upon market re-entry, tapering to around 150 bps five years out; in 1970- 2011 the respective estimates are about 400 and 200 bps. We also find that: (i) these estimates are robust to many controls including on actual haircuts; (ii) the DP accounts for as much as 60% of the sovereign spread within five years of market re-entry; (iii) the DP rises with market exclusion spells. These findings help reconnect theory and evidence on why sovereign defaults are infrequent and earlier debt settlements are desirable.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund