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Why Do Emerging Economies Borrow Short Term?

UPF Economics and Business Working Paper 838

64 Pages Posted: 29 Nov 2005 Last revised: 21 Jun 2013

Fernando Broner

CREI; Barcelona GSE; Universitat Pompeu Fabra; CEPR

Guido Lorenzoni

Northwestern University; National Bureau of Economic Research (NBER)

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Multiple version iconThere are 4 versions of this paper

Date Written: August 1, 2004

Abstract

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

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

Fernando Broner (Contact Author)

CREI ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

HOME PAGE: http://www.crei.cat/people/broner

Barcelona GSE

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

HOME PAGE: http://www.crei.cat/people/broner

CEPR ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom
+34 93 542 2601 (Phone)

Guido Lorenzoni

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sergio Schmukler

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/en/about/people/s/sergio-schmukler

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