Emerging Countries' Sovereign Risk: Balance Sheet Effects, Global Risk Aversion, and Contagion

FINANCIAL CONTAGION: THE VIRAL THREAT TO THE WEALTH OF NATIONS, Chapter 3, Robert W. Kolb, ed., John Wiley & Sons Inc., 2011

15 Pages Posted: 17 Nov 2011

See all articles by Alicia García-Herrero

Alicia García-Herrero

Bruegel; Hong Kong University of Science & Technology (HKUST) - HKUST Institute for Emerging Market Studies (IEMS); Natixis

Date Written: June 2005

Abstract

Three important external determinants of sovereign spreads in emerging countries are reviewed: balance sheet effects, global risk aversion and contagion. While there are ways to reduce the detrimental impact of balance sheet effects, these are either hard to implement or costly. Insurance against them would need to be considered either in the form of self insurance (accumulation of reserves) or market insurance (instruments which are inversely related to a country’s real exchange rate). In addition, the cost of self insurance might be too high and private insurance not easily available because of shallow markets. This is why regional insurance has an important role to play.

Keywords: balance sheets, contagion, risk aversion

JEL Classification: F0, F32, F36, F37, G11

Suggested Citation

Garcia-Herrero, Alicia, Emerging Countries' Sovereign Risk: Balance Sheet Effects, Global Risk Aversion, and Contagion (June 2005). FINANCIAL CONTAGION: THE VIRAL THREAT TO THE WEALTH OF NATIONS, Chapter 3, Robert W. Kolb, ed., John Wiley & Sons Inc., 2011 , Available at SSRN: https://ssrn.com/abstract=1960870

Alicia Garcia-Herrero (Contact Author)

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

Hong Kong University of Science & Technology (HKUST) - HKUST Institute for Emerging Market Studies (IEMS) ( email )

IAS 2019, Lo Ka Chung Building,
Lee Shau Kee Campus, HKUST
Clear Water Bay, Kowloon
Hong Kong

Natixis ( email )

France