Sovereign Borrowing by Developing Countries: What Determines Market Access?

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.What determines the ability of governments from developing countries to access international credit markets? We examine this question using detailed data on sovereign bond issuances and public syndicated bank loans since 1982. We find that traditional measures of a country's links with the rest of the world (such as trade openness) and traditional liquidity and macroeconomic indicators do not help much in explaining market access. However, a country's vulnerability to shocks and the perceived quality of its policies and institutions appear to be important determinants of its government's ability to tap the markets. We are unable to detect strong punishment of defaulting countries by credit markets. JEL Classification Numbers: F34, G15

Default Risk and Income Fluctuations in Emerging Economies

“…Table 3 summarizes the parameter values. The calibrated probability to re-enter financial markets of 0.282 is consistent with the estimates of Gelos et al (2002) who find that during the default episodes of the 1990s, economies were excluded from the credit markets only for a short period of time. The calibrated output costs are also consistent with the empirical observation that Argentina's output was below trend for 85% of the time while in state of default (December 2001 to March 2004) before the country renegotiated its debt.…”

“…18 Using a comprehensive firm level dataset for Ecuador, Arellano and Kartashova (2007) find that during the 1999 sovereign default which featured 24% reduction in private credit, firms with the largest dependency on credit decrease their output disproportionately and account for a large fraction of the output collapse. 19,20 In this paper, we assume this reduced form specification for default costs that is consistent with empirical observations and use it to calibrate the historical default probability for Argentina. The discipline is then on how the model performs in terms of spread fluctuations and co-movements given an empirical default probability.…”

“…The disproportional decrease in sales for highly indebted firms is maintained even after controlling for firm specific fixed effects in a panel regression. 20 The output implications of financial constraints have been studied extensively in works such as Bernanke and Gertler (1989) and Kyotaki and Moore (1997). See also Mendoza (2006) for a quantitative exploration of the 1995 Mexican recession based on financial constraints.…”

Long-duration bonds and sovereign defaults

“…Wright (2005) discusses how in the past three decades the sovereign debt market has become more competitive and explains how an increase in competition (number of creditors) may diminish the creditors' ability to coordinate and punish defaulting countries by excluding them from capital markets (see also Athreya and Janicki (2006), Cole et al (1995), , and Wright (2002) (2000), Gelos et al (2004), and Meyersson (2006) …”

Solving the Feldstein-Horioka Puzzle With Financial Frictions

“…This seems unrealistic. Gelos, Sahay, and Sandleris (2004) documented that, on average, defaulting countries are excluded from international financial markets for 5 years, which implies an η of 20%. Moreover, capital flows and dispersions of savings and investment rates would be even lower.…”