engleski

Long-run and short-run determinants of original sinners' sovereign spreads

This paper builds an empirical model of sovereign spreads and its determinants, relying on recent theories on imperfect capital markets and balance sheet effects. We investigate nine European emerging economies that suffer from the “original sin”, over the period 2001-2011, using pooled mean group estimator of dynamic panel error correction model. This methodology improves estimation efficiency and model performance, but it also allows differentiation between long-run and short-run spread determinants. We find that in the longrun, sovereign spreads increase in response to a higher share of external debt in GDP, while they move in the opposite direction when the shares of current account and international reserves in GDP rise. In the short-run, sovereign spreads deviate from the long-run equilibrium, with half of the adjustment taking place in eight months. Our results suggest that in the short-run, higher external debt service caused by exchange rate depreciation, i.e. balance sheet effect, and market volatility tend to raise spreads, while higher tax revenues tend to decrease them. Moreover, we show that the rise in sovereign spreads is not due to the increase in the size of external debt, but due to larger debt burden represented by balance sheet effects.

balance sheet effect; emerging Europe; euroization; original sin; sovereign spreads

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