Global Monetary Conditions Versus Country-Specific Factors in the Determination of Emerging Market Debt Spreads

31 Pages Posted: 28 Jul 2005

See all articles by Paul R. Masson

Paul R. Masson

International Monetary Fund (IMF) - Research Department; The Brookings Institution

Mansoor Dailami

World Bank

Jean Jose Padou

University of Toronto

Date Written: June 2005

Abstract

We offer evidence in this paper that US interest rate policy has an important influence in the determination of credit spreads on emerging market bonds over US benchmark treasuries, and therefore on their cost of capital. Our analysis improves upon the existing literature and understanding by addressing the dynamics of market expectations in shaping views on interest rate and monetary policy changes and by recognizing nonlinearities in the link between US interest rates and emerging market bond spreads, as the level of interest rates affects the market's perceived probability of default and the solvency of emerging market borrowers. For a country with a moderate level of debt, repayment prospects would remain good in the face of an increase in US interest rates, so there would be little increase in spreads. A country close to the borderline of solvency would face a steeper increase in spreads. Simulations of a 200 basis points (bps) increase in US short-term interest rates (ignoring any change in the US 10 year Treasury rate) show an increase in emerging market spreads ranging from 6 bps to 65 bps, depending on debt/GDP ratios.

Suggested Citation

Masson, Paul R. and Dailami, Mansoor and Padou, Jean Jose, Global Monetary Conditions Versus Country-Specific Factors in the Determination of Emerging Market Debt Spreads (June 2005). World Bank Policy Research Working Paper Series No. 3626, Available at SSRN: https://ssrn.com/abstract=756833

Paul R. Masson

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

The Brookings Institution ( email )

1775 Massachusetts Ave. NW
Washington, DC 20036-2188
United States
202-797-6278 (Phone)
202-797-2968 (Fax)

Mansoor Dailami (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/mdailami

Jean Jose Padou

University of Toronto

Toronto, Ontario M5S 3E6 M5S 3G8
Canada

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