UPF Economics and Business Working Paper 838
64 Pages Posted: 29 Nov 2005 Last revised: 21 Jun 2013
Date Written: August 1, 2004
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.
Keywords: Emerging market debt, maturity structure,sovereign spreads, risk premium, term premium, financial crises
JEL Classification: E43, F30, F32, F34, F36, G15
Suggested Citation: 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: https://ssrn.com/abstract=859604 or http://dx.doi.org/10.2139/ssrn.859604