Sovereign Debt Distress and Corporate Spillover Impacts

Dailami, Mansoor

关键词: ACTIVE MARKET;    ASSET CLASS;    BALANCE OF PAYMENTS;    BALANCE OF PAYMENTS CRISIS;    BALANCE SHEETS;   

DOI  :  10.1596/1813-9450-5380
RP-ID  :  WPS5380

学科分类：社会科学、人文和艺术（综合）

来源: World Bank Open Knowledge Repository

【 摘 要 】

In much of the standard corporatefinance literature in which sovereign debt is treated as arisk free asset, corporate bond prices are seen to depend onidiosyncratic risk factors specific to the issuing company,with public debt playing an indirect role to the extent thatit affects the term structure of interest rates. In thecorporate world, however, the ability of a borrower toaccess international capital markets and the terms accordingto which it can raise capital depend not only on its owncreditworthiness, but also on the financial health of itshome-country sovereign. In times of financial stress, wheninvestors lose confidence in the government's abilityto use public finances to stabilize the economy or provide asafety net for corporations in distress, markets'assessment of private credit risk takes on a completelydifferent dynamic than during normal times, incorporating anadditional risk premium to compensate investors for thepotential consequences of sovereign default. Using a newdatabase that covers nearly every emerging-market corporateand sovereign entity that has issued bonds on global marketsbetween 1995 and 2009, this paper investigates the degree towhich heightened sovereign default risk perceptions duringtimes of market turmoil influence the determination ofcorporate bond yield spreads, controlling for specific bondattributes and common global risk factors. Econometricevidence presented confirms that investors' perceptionsof sovereign debt problems translate into higher costs ofcapital for private corporate issuers, with the magnitude ofsuch costs increasing at times when sovereign bonds trade atspreads exceeding a threshold of 1000 bps. The key policyrecommendation emerging from the analysis relates to theneed to improve sovereign creditworthiness in order toprevent a loss in investor confidence that could trigger apanicky sell-off in sovereign debt with adversemacroeconomic and fiscal consequences. Implications forfuture research point to the need to develop better modelsof corporate bond pricing and valuation, recognizingexplicitly the role of sovereign credit risk.