Political and Fiscal Risk Determinants of Sovereign Spreads in Emerging Markets

Using a panel of 46 emerging market economies from 1997 to 2008, this paper investigates the key determinants of country risk premiums as measured by sovereign bond spreads. Unlike previous studies, the results indicate that both political and fiscal factors matter for credit risk in emerging markets. Lower levels of political risk are associated with tighter spreads, particularly during financial turmoil. Efforts at fiscal consolidation narrow credit spreads, especially in countries with high initial public debt levels. The composition of fiscal policy also matters as higher public investment lowers spreads as long as the fiscal position remains sustainable and the fiscal deficit does not worsen.     

Emerging market sovereign spreads,global financial conditions and U.S. macroeconomic news

We investigate the impact of global financial conditions, U.S. macroeconomic news and domestic fundamentals on the evolution of EMBI spreads for a panel of 18 emerging market (EM) countries using daily data. To this end, we consider not only the conventional panel cointegration procedures but also the recent common correlated effects method to tackle cross-section dependence that may stem from common global shocks such as contagion. The results suggest that the long-run evolution of EMBI spreads depends on global financial conditions, crises contagion and domestic fundamentals proxied by sovereign ratings. The results from panel equilibrium correction models suggest that EMBI spreads respond substantially also to U.S. macroeconomic news and changes in the Federal Reserve's target interest rates. The magnitude and the sign of the effect of the U.S. news, however, crucially depend on the state of the U.S. economy, such as the presence of inflation dominance.     

Modelling sovereign credit ratings: The accuracy of models in a heterogeneous sample

The accuracy of sovereign credit ratings renewed interest toward sovereign credit ratings in the aftermath of the 2008 financial crisis. The controversy over the accuracies encouraged internal credit scoring systems to reduce reliance on sovereign credit ratings. By employing classification and regression trees (CART), multilayer perceptron (MLP), support vector machines (SVM), Bayes Net, and Naïve Bayes; we explore the prediction performance of several artificial intelligence (AI) techniques in predicting sovereign credit ratings in a heterogeneous sample. The results suggest that AI classifiers outperform the conventional statistical technique in terms of accurate prediction. According to within one notch and two notches accurate prediction measure, the prediction performances of the AI classifiers exceed 90% accuracy whereas the performance of the conventional statistical method is around 70%. The results further reveal that the prediction performance of the models declines around the threshold rating that is located between investment grade and speculative grade which is not necessarily the result of inadequacy of the models. Rather, this is potentially due to CRAs' cautious behaviour toward those countries around threshold rating which can be interpreted as the certification price of upgrading to investment grade.     

Forecasting Turkey’s Credit Ratings with Multivariate Grey Model and Grey Relational Analysis

The concept of credit rating rooted back to mid-nineteenth century has become one of the most important elements in the world economy together with the globalization period gradually accelerating in the last two decades and increasing the interaction and sensitivity in the international markets. With the globalization and deepening in the financial markets; the effect, reliability and stability of knowledge of the actors who are in charge for directing the global capital flows have quite a big importance in terms of the decisions to be made in the future. In this process, credit rating agencies eliminating the information asymmetry between the countries and institutions who want to create financial resource by borrowing from the savings owners and foreign institutions. Credit ratings determined by the mentioned organizations are accepted as an indicator of the countries to meet the financial obligations in other words their creditworthiness. For Turkey’s economy having a structure with a high level of external financing needs in terms of accelerating the growth and development process, it is inevitable to have an international creditworthiness increasing long-term investment tendency meeting foreign capitals’ trust search. In this study, firstly the determinants of the credit ratings given by credit rating agencies are determined and then forecasting Turkey’s future credit ratings by combining them with multivariate grey model and grey relational analysis are performed.

     

Can fiscal rules improve financial market access for developing countries?

A number of countries have introduced fiscal rules to deter fiscal profligacy, enhance the credibility of fiscal policy, and reduce borrowing costs. In this paper, we examine the outcome of fiscal rules in terms of improving financial market access for developing countries. We use entropy balancing and various propensity score matching. We find that the adoption of fiscal rules reduces sovereign bond spreads and increases sovereign debt ratings for a sample of 36 developing countries, which are part of the JP Morgan Emerging Markets Bond Index Global (EMBIG), for the period 1993-2014. We explain this finding by the effect of fiscal rules on the credibility of a country's fiscal policy: more credible governments are rewarded in the international financial markets by low sovereign bond spreads and high sovereign debt ratings. These results are robust to a wide set of alternative specifications. We also show that this favorable effect is sensitive to several country structural characteristics. Our findings confirm that the adoption and sound implementation of fiscal rules is an instrument for policy makers to improve developing countries’ financial market access.     

Sovereign credit ratings,growth volatility and the global financial crisis

Using monthly data from January 1996 to May 2010 for a panel of 76 developed and emerging economies and adopting an instrumental variable (IV) estimation technique by correcting for both heterogeneity and endogeneity with the generalized two-stage least squares (G2SLS, EC2SLS) procedure method suggested by Balestra and Varadharajan-Krishnakumar (1987) and Baltagi and Li (1995), this article provides empirical evidence that volatility of per capita GDP growth is reduced when there are positive changes in credit ratings; in other words when sovereign credit risk improves. To deal with potential simultaneity between sovereign credit ratings and output volatility, a system (3SLS) approach is undertaken, and our findings remain robust. By weakening the volatility dampening effects of ratings changes, it is found that the global financial crisis (GFC) has enhanced macroeconomic volatility. One of the channels via which sovereign rating changes affect growth volatility is the financial markets’ repricing of sovereign default risk that is reflected in sovereign credit default swap (CDS) spreads and its volatility.     

Credit ratings and bond spreads of the GIIPS

We examine the relationship between credit ratings and bond yield spreads of peripheral countries in the euro area (Greece, Ireland, Italy, Portugal and Spain) for the period 1995–2014. Since 2012, bond spreads of those countries have come down very fast, whereas credit ratings have hardly changed. Our results suggest that credit rating agencies have become more cautious and have changed their approach to assess credit risk of sovereigns, and that the impact of sovereign credit risk ratings on sovereign bond spreads has changed.     

Dynamic relationship between Turkey and European countries during the global financial crisis

This study examines the relationship between time-varying risk perceptions of investors towards major European countries and Turkey. In that manner, we first obtain the dynamic conditional correlations between the credit default spreads (CDSs) of Turkey and 13 European countries from September 2004 to April 2013. Next, we endogenously detect the shifts in these dynamic correlation levels using a penalized contrast methodology. Accordingly, we find positive level shifts in all correlations following the US crisis. The upward trend in all CDS correlations holds during the eurozone debt crisis, but positive changes in correlations are not flagged as level shifts by the model, except in a few cases. The results suggest that Turkey is not immune to global financial conditions and there is integration between Turkey and the major European economies in terms of risk perception after the global financial crisis.     

Investment in emerging market economies

This article empirically models investment in emerging economies. Using dynamic panel estimation methods and quarterly data for 31 emerging economies for the period 1990:1?C2008:3, we show that (i) the GDP and the cost of capital are the key fundamental determinants of investment; (ii) financial factors (such as equity prices, credit and lending rate) play a relevant role on the dynamics of investment, in particular, for Asian and Latin American countries; (iii) investment growth exhibits substantial persistence and (iv) crises episodes magnify the negative response of investment.     

PIGS or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies

This paper asks whether rating agencies played a passive role or were an active driving force during Europe??s sovereign debt crisis. We address this by estimating relationships between sovereign debt ratings and macroeconomic and structural variables. We then use these equations to decompose actual ratings into systematic and arbitrary components that are not explained by previously observed procedures of rating agencies. Finally, we check whether systematic, as well as arbitrary, parts of credit ratings affect credit spreads. We find that both do affect credit spreads, which opens the possibility that arbitrary rating downgrades trigger processes of self-fulfilling prophecies that may drive even relatively healthy countries towards default.     

Determinants of sovereign bond yield spreads in the EMU: An optimal currency area perspective

In the light of the recent financial crisis, we take a panel cointegration approach that allows for structural breaks to the analysis of the determinants of sovereign bond yield spreads in nine economies of the European Monetary Union. We find evidence for a level break in the cointegrating relationship. Moreover, results show that (i) fiscal imbalances – namely expected government debt-to-GDP differentials – are the main long-run drivers of sovereign spreads; (ii) liquidity risks and cumulated inflation differentials have non-negligible weights; but (iii) all conclusions are ultimately connected to whether or not the sample of countries is composed of members of an Optimal Currency Area (OCA). In particular, we establish (i) that results are overall driven by those countries not passing the OCA test; and (ii) that investors closely monitor and severely punish the deterioration of expected debt positions of those economies exhibiting significant gaps in competitiveness.     

Do sovereign rating announcements affect emerging market exchange rate correlations? A multivariate DCC-GARCH approach

This article investigates the effects of sovereign credit rating announcements on time-varying exchange rate return correlations for a sample of 11 emerging market countries over the period 2002–2015. The data set covers daily exchange rates and long-term foreign currency sovereign ratings, outlooks and watch list. The pairwise time-varying correlations are derived by corrected Dynamic Conditional Correlation (cDCC) modelling which is a member of multivariate Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models family. Furthermore, to capture the global factor effect, a dynamic-weighted index is created by using dynamic principal component (DPC) analysis. Findings suggest that some of the emerging market exchange rate co-movements are affected by rating announcements. Upgrades of Moody’s and downgrades of Fitch lead to spillovers. Main source of these spillovers are sovereign credit rating changes of European countries, especially Czech Republic and Turkey. Countries with high amount of external debt, large current account deficit and speculative grade are more prone to be influenced by announcements on a foreign country’s long-term sovereign rating.     

On the time-varying relationship between EMU sovereign spreads and their determinants

We use a dynamic multipath general-to-specific algorithm to capture structural instability in the link between euro area sovereign bond yield spreads against Germany and their underlying determinants over the period January 1999–August 2011. We offer new evidence suggesting a significant heterogeneity across countries, both in terms of the risk factors determining spreads over time as well as in terms of the magnitude of their impact on spreads. Our findings suggest that the relationship between euro area sovereign risk and the underlying fundamentals is strongly time-varying, turning from inactive to active since the onset of the global financial crisis and further intensifying during the sovereign debt crisis. As a general rule, the set of financial and macro spreads' determinants in the euro area is rather unstable but generally becomes richer and stronger in significance as the crisis evolves.     

我国企业债券信用利差宏观决定因素研究

文章以Merton(1974)的结构化模型为基础,基于2000年2月至2010年9月的面板数据,对影响我国沪深债市企业债券信用利差因素进行了实证研究。研究结果表明,GDP指数和M1发行量对企业债券信用利差的影响为正,无风险利率和收益率曲线斜率的影响为负。此外,模型的解释力明显随信用级别的降低而提高,且加入非线性变量和前期变量后模型的拟合度大幅提高,说明新模型更加符合实际情况。     

An empirical study of credit shock transmission in a small open economy

In this paper, we identify and estimate the dynamic effects of foreign (US) and national (Canadian) credit shocks in a small open economy. We use standard credit spreads as proxies to the external finance premium. Our first result suggests that the US and Canadian credit spreads contain substantial forecasting power for several measures of the Canadian real economic activity, especially during the recent financial crisis and its aftermath. Secondly, an adverse US credit shock generates a significant and persistent economic slowdown in Canada: the national external finance premium rises immediately while interest rates, credit aggregates, output and employment indicators decline. Variance decomposition reveals that credit shocks have a sizeable effect on real activity measures, leading indicators and credit spreads. Yet, the unexpected shocks in domestic credit spreads are not able to generate any significant dynamic response of the real activity once we control for the US credit market conditions.     

Macroeconomic determinants of the credit risk in the banking system: The case of the GIPSI

In this paper, we analyze the link between the macroeconomic developments and the banking credit risk in a particular group of countries – Greece, Ireland, Portugal, Spain and Italy (GIPSI) – recently affected by unfavourable economic and financial conditions.Employing dynamic panel data approaches to these five countries over the period 1997q1–2011q3, we conclude that the banking credit risk is significantly affected by the macroeconomic environment: the credit risk increases when GDP growth and the share and housing price indices decrease and rises when the unemployment rate, interest rate, and credit growth increase; it is also positively affected by an appreciation of the real exchange rate; moreover, we observe a substantial increase in the credit risk during the recent financial crisis period. Several robustness tests with different estimators have also confirmed these results.The findings of this paper indicate that all policy measures that can be implemented to promote growth, employment, productivity and competitiveness and to reduce external and public debt in these countries are fundamental to stabilize their economies.     

The time-varying relationship between credit spreads and employment growth

After the global financial crisis, several central banks introduced unconventional monetary policies, such as quantitative easing (QE). If QE increases asset prices, but does not boost the real economy to the same extent, the relationship between credit spreads and employment growth will weaken. This study investigates this issue for the U.S. in a moving-windows framework. Our results suggest that the link between credit spreads and employment growth is lower during bubbles and recessions. We also find that the relationship weakened after the Fed introduced QE.     

Determinants of government bond spreads in the euro area: in good times as in bad

Government bond spreads increased rapidly during the financial turmoil in the euro area. In general, government bond spreads in the euro area are attributed to solvency and liquidity risks and determinants thereof. This paper proposes the use of latent processes to model the time variation present in the evaluation of these determinants. In contrast to approaches using global measures like the US corporate bond spreads or short-term interest rates to approximate time variation, our model is also flexible enough to deal with the unfolding of the financial crisis. The findings suggest that the expected debt-to-GDP ratio explains a major part of the differences in bond yields in the euro area between 2003 and the unfolding of the financial crises. Coefficients for many determinants increased rapidly during the financial crises. Especially market capitalization gained relative importance in winter 2008/2009.     

Private investment and financial development in a globalized world

Using recently developed panel data techniques on data for 43 developing countries over the period 1970?C1998, this article provides an exhaustive analysis of causality between aggregate private investment and financial development. A common factor approach on annual data, allowing for global interdependence and heterogeneity across countries, suggests positive causal effects going in both directions. The finding has rich implications for the development of financial markets and the conduct of macroeconomic policies in developing countries in an integrated global economy.     

Risks of Latin America sovereign debts before and after the financial crisis

We investigate the financial determinants of the return and volatility of sovereign CDS spread from six major Latin American countries before and after the bankruptcy of Lehman Brothers. Other than CBOE VIX index, we also find that global factors including US Baa–Aaa default yield, TED spread and US Treasury rate all contribute to the changes in these sovereign CDS spread. Although global risk aversion (VIX) is a significant determinant of sovereign debt spread, in the years after the crisis, the emphasis has shifted towards short-term refinancing risk (TED). Furthermore, the risk of Greek sovereign debt crisis also transmitted Latin American CDS spreads immediately, but only in the post-Lehman sub-period. These findings provide implications for international bonds and credit derivatives trading strategies.