External shock vulnerability keeps sovereigns from playing in debt markets, says IMF working paper

By Reshmi Basu

New York, Dec. 8 -A sovereign's vulnerability to external shocks is among the factors that can help block its access to the capital markets, according to an International Monetary Fund working paper titled "Sovereign borrowing by developing countries: What determines market access?" by R. Gaston Gelos, Ratna Sahay, and Guido Sandleris

The working paper - which represents the researchers' findings, not the IMF's views - examines the ability of developing countries to access markets over different stages of the international credit market cycle.

The authors look at individual bond issuances and syndicated bank loans by sovereigns from the beginning of the Latin American debt crisis in 1982 until 2002, choosing that period because it included both market stagnation and expansion.

The analysis shows that economies that did not access the markets suffer from more political instability and poor perceptions of their policies and institutions and they are more vulnerable to external shocks.

Interestingly, the authors find that "links of the economy to the world" such as trade openness or the share of foreign direct investment do not raise the probability of access.

Other findings that countries that consistently access markets tend to have higher exports to debt service ratios.

And the probability of access is not strongly influenced by a default in the prior year. Defaulting countries appear to be free of strong punishment by the credit market.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.