We introduce a new measure of emerging market sovereign credit risk: the local currency credit spread, defined as the spread of local currency bonds over the synthetic local currency risk-free rate constructed using cross-currency swaps. We find that local currency credit spreads are positive and sizable. Compared with credit spreads on foreign currencydenominated debt, local currency credit spreads have lower means, lower crosscountry correlations, and are less sensitive to global risk factors. We discuss several major sources of credit spread differentials, including selective default, capital controls, covariance between currency and credit risk, and various financial market frictions.

The authors acknowledge support from the Smith Richardson Foundation, though views and findings are ours alone. We thank Raul Galicia Duran for capable research assistance, Roel Beetsma and Martin Muhleisen for sharing their data, and Max Otto and Snezhana Zlatinova for suggesting the use of EU data on national fiscal rules. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w18283.ack NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

for excellent research assistance. Our analysis makes use of data that are proprietary to Morningstar and/or its content providers. Neither Morningstar nor its content providers are responsible for any of the views expressed in this article. We thank the Becker-Friedman Institute, the NSF (1653917), the Sloan Foundation, and the Weatherhead Center for financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.