Why Do Emerging Economies Borrow Short Term?
Fernando A. Broner
CREI; Universitat Pompeu Fabra; Barcelona GSE; CEPR
Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)
Sergio L. Schmukler
World Bank - Development Research Group (DECRG)
CEPR Discussion Paper No. DP6249
We argue that emerging economies borrow short term due to the high risk premium charged by bondholders on long-term debt. First, we present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a rollover crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a trade-off between safer long-term debt and cheaper short-term debt. Second, we construct a new database of sovereign bond prices and issuance. We show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting towards shorter maturities. The evidence suggests that international investors' time-varying risk aversion is crucial to understand the debt structure in emerging economies.
Number of Pages in PDF File: 67
Keywords: emerging market debt, financial crises, investor risk aversion, maturity structure, risk premium, term premium
JEL Classification: E43, F30, F32, F34, F36, G15working papers series
Date posted: May 21, 2008
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