Estimating Default Probabilities of Emerging Market Sovereigns: A New Look at a Not-so-New Literature

56 Pages Posted: 27 Sep 2007

See all articles by Marcel Peter

Marcel Peter

Swiss National Bank - International Research and Technical Assistance Division

Date Written: April 2002

Abstract

The January 2001 proposal for a New Basel Capital Accord has renewed the interest in obtaining default probabilities for various types of borrowers. This paper uses a panel logit model to estimate default probabilities of 78 emerging market countries (1984-97) as a function of a set of economic and political variables. These sovereign default probabilities are then compared with the default rates associated with the sovereign credit ratings of the two major rating agencies, Moody's Investors Service and Standard & Poor's. Unlike the existing literature, we define the dependent variable ("sovereign default") differently, using the changes in the levels of debt arrears and amounts rescheduled as criteria instead of the levels themselves. The paper finds, first, that the most important determinants of sovereign default appear to be the past repayment performance of a country, the cost of international credit, the volatility of per capita income, and political risks. Second, the comparison of estimated default probabilities with rating agencies' default rates gives some preliminary evidence that the latter seem to considerably underestimate sovereign default risk. In other words, sovereign credit ratings appear to be to high on average.

Keywords: default rate, determinant, rating agency, sovereign credit rating, sovereign default probability

JEL Classification: F32, F34, G15, G21

Suggested Citation

Peter, Marcel, Estimating Default Probabilities of Emerging Market Sovereigns: A New Look at a Not-so-New Literature (April 2002). Available at SSRN: https://ssrn.com/abstract=1017468 or http://dx.doi.org/10.2139/ssrn.1017468

Marcel Peter (Contact Author)

Swiss National Bank - International Research and Technical Assistance Division ( email )

Boersenstrasse 15
P.O. Box
Zurich, 8022
Switzerland

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