How Does Public External Debt Affect the Cost of Corporate Borrowing? Evidence from Syndicated Loans in Emerging Markets
George Washington University - School of Business, Department of Finance
International Monetary Fund (IMF) - Research Department
March 18, 2009
AFA 2010 Atlanta Meetings Paper
We estimate the effect of sovereign external debt on corporate external borrowing costs using data on the yield spreads on syndicated loans issued by foreign banks in 38 emerging markets during the period 1990-2006. Our results show a significant and sizable positive effect of public external debt on loan spreads, suggesting that a higher level of sovereign external debt increases the perceived riskiness of lending to emerging market firms. We also find that the effect of public external debt on loan spreads is stronger in economies with weak creditor protection. This finding is consistent with creditors seeking higher premium against the possibility of a debt crisis in countries where the creditor protection is weak. Overall, our findings underscore the costs of fiscal profligacy for the corporate sector even when debt is issued in foreign markets.
Keywords: Sovereign external debt, corporate borrowing, syndicated loans, emerging markets, creditor rights
JEL Classification: G2, G3, E62, K0working papers series
Date posted: March 25, 2009
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