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Why Do Emerging Economies Borrow Short Term?


Fernando Broner


CREI; Universitat Pompeu Fabra; Barcelona GSE; CEPR

Guido Lorenzoni


Northwestern University; National Bureau of Economic Research (NBER)

Sergio L. Schmukler


World Bank - Development Research Group (DECRG)

August 1, 2004

UPF Economics and Business Working Paper 838

Abstract:     
We argue that emerging economies borrow short term due to the high risk premium charged by international capital markets 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 liquidity 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 borrowing 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 toward shorter maturities. This suggests that changes in bondholders' risk aversion are important to understand emerging market crises.

Number of Pages in PDF File: 64

Keywords: Emerging market debt, maturity structure,sovereign spreads, risk premium, term premium, financial crises

JEL Classification: E43, F30, F32, F34, F36, G15

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Date posted: November 29, 2005 ; Last revised: June 21, 2013

Suggested Citation

Broner, Fernando and Lorenzoni, Guido and Schmukler, Sergio L., Why Do Emerging Economies Borrow Short Term? (August 1, 2004). UPF Economics and Business Working Paper 838. Available at SSRN: http://ssrn.com/abstract=859604 or http://dx.doi.org/10.2139/ssrn.859604

Contact Information

Fernando Broner (Contact Author)
CREI ( email )
Ramon Trias Fargas, 25-27
Barcelona, Catalonia 08005
Spain
+34 93 542 2601 (Phone)
+34 93 542 1860 (Fax)
HOME PAGE: http://www.crei.cat/people/broner
Universitat Pompeu Fabra ( email )
Ramon Trias Fargas, 25-27
Barcelona, Catalonia 08005
Spain
+34 93 542 2601 (Phone)
+34 93 542 1860 (Fax)
HOME PAGE: http://www.crei.cat/people/broner
Barcelona GSE
Ramon Trias Fargas 25-27
Barcelona, Catalonia 08005
Spain
+34 93 542 2601 (Phone)
CEPR ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
+34 93 542 2601 (Phone)
+34 93 542 1860 (Fax)
Guido Lorenzoni
Northwestern University ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Sergio Schmukler
World Bank - Development Research Group (DECRG) ( email )
1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)
HOME PAGE: http://econ.worldbank.org/staff/sschmukler
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