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Political and Fiscal Risk Determinants of Sovereign Spreads in Emerging Markets
Author(s) -
Baldacci Emanuele,
Gupta Sanjeev,
Mati Amine
Publication year - 2011
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/j.1467-9361.2011.00606.x
Subject(s) - economics , political risk , fiscal policy , emerging markets , bond , debt , fiscal sustainability , monetary economics , credit risk , position (finance) , consolidation (business) , politics , financial market , financial system , macroeconomics , finance , political science , law
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.