Does Gross or Net Debt Matter More for Emerging Market Spreads?

December 22, 2016

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Format: Chicago

Metodij Hadzi-Vaskov, and Luca A Ricci. Does Gross or Net Debt Matter More for Emerging Market Spreads?, (USA: International Monetary Fund, 2016) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Does gross or net debt matter for long-term sovereign spreads in emerging markets? The topic is important for undestanding the borrowing cost implications of public assetliability management decisions (e.g. using assets to lower debt). We investigate this question using data on emerging market economies (EMEs) over the period 1998–2014. We find that both gross debt and assets have a significant impact on long-term sovereign bond spreads in emerging markets, with effects roughly offsetting each other (coefficients of opposite sign and similar magnitude). Hence, net debt seems more appropriate than gross debt when evaluating the impact of indebtedness on spreads. The empirical results suggest that an increase in net debt by 10 percentage points of GDP implies an increase in the spread by 100–120 basis points, and the effect is larger during periods of domestic distress. The key results from this empirical study are quite robust to alternative specifications and subgroups of EMEs.

Subject: Central banks, Credit default swap, Emerging and frontier financial markets, Financial markets, Inflation, International reserves, Money, Prices, Public debt

Keywords: Asia and Pacific, Asset, Credit default swap, Debt, Debt effect, Debt net, Emerging and frontier financial markets, Emerging markets Authors’, Europe, Financial asset, Global, Government debt, Gross debt, Inflation, International reserves, Net debt, Sovereign bond spreads, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/246
Stock No:

WPIEA2016246
ISBN:

9781475563108
ISSN:

1018-5941

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