Why Do Emerging Economies Borrow Short Term?
CREI; Barcelona GSE; Universitat Pompeu Fabra; CEPR
Northwestern University; National Bureau of Economic Research (NBER)
Sergio L. Schmukler
World Bank - Development Research Group (DECRG)
August 1, 2004
UPF Economics and Business Working Paper 838
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.
Number of Pages in PDF File: 64
Keywords: Emerging market debt, maturity structure,sovereign spreads, risk premium, term premium, financial crises
JEL Classification: E43, F30, F32, F34, F36, G15
Date posted: November 29, 2005 ; Last revised: June 21, 2013