The Impact of Debt Sustainability and the Level of Debt on Emerging Markets Spreads
32 Pages Posted: 8 Jun 2013
Date Written: May 2013
How do financial markets respond to concerns over debt sustainability and the level of public debt in emerging markets? We introduce a measure of debt sustainability – the difference between the debt stabilizing primary balance and the primary balance – in an otherwise standard spread regression model applied to a panel of 26 emerging market economies. We find that debt sustainability is an important determinant of spreads. In addition, using a panel smooth transition regression model, we find that the sensitivity of spreads to debt sustainability doubles as public debt increases above 45 percent of GDP. These results suggest that market interest rates react more to debt sustainability concerns in a country with a high level of debt compared to a country with a low level of debt.
Keywords: Debt sustainability, Public debt, Capital markets, Emerging markets, Economic models, Sovereign debt, sovereign spreads, emerging markets debt., external debt, sovereign bond, debt ratio, debt crises, sovereign bonds, sovereign debt crises, debt ratios, current account, debt threshold, external borrowing, debt thresholds, debt crisis, debt intolerance, domestic debt, debt stock, domestic financial markets, debt management, global liquidity, external shocks, international lending, local debt, sovereign default, debt dynamics, market debt, central bank, debt problems, sovereign defaults
JEL Classification: E44, E62, F34, G15, H63
Suggested Citation: Suggested Citation