Determinants of Spreads on Sovereign Bank Loans: The Role of Credit History

29 Pages Posted: 18 Nov 2005

See all articles by Peter Benczur

Peter Benczur

Central European University (CEU) - Department of Economics; National Bank of Hungary - Economics & Research Department

Cosmin L. Ilut

Duke University

Date Written: November 2005

Abstract

This paper is an empirical investigation into the role of credit history in determining the spread on sovereign bank loans. It employs an error-in-variables approach used in rational-expectations-macro-econometrics to set up a structural model that links sovereign loan spreads to realized repayment behavior. Unlike the existing empirical literature, its instrumental variables method allows for distinguishing a direct influence of past repayment problems (a "pure reputation" effect) from one that goes through increased default probabilities. Using developing country data from the period 1973-1981 and constructing continuous variables for credit history, we find that past default is a significant determinant of the spread, even after including country fixed effects. Moreover, its reduced-form effect is very similar to its structural form effect, indicating that most of the influence of past repayment problems is through the reputation channel. Overall, past and predicted future default are substantial determinants of sovereign bank loan spreads.

Keywords: reputation, sovereign bank loan spreads, default risk, rational expectations

JEL Classification: F30, F34, G12, G14, G15

Suggested Citation

Benczur, Peter and Ilut, Cosmin L., Determinants of Spreads on Sovereign Bank Loans: The Role of Credit History (November 2005). Available at SSRN: https://ssrn.com/abstract=850044 or http://dx.doi.org/10.2139/ssrn.850044

Peter Benczur (Contact Author)

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary

National Bank of Hungary - Economics & Research Department ( email )

Szabadsag ter 8-9
Budapest, H-1850
Hungary

Cosmin L. Ilut

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

HOME PAGE: http://econ.duke.edu/~cli2/index.html

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