Debt Burden and Perceived Sovereign Default Risk: Evidence from Credit Default Swaps

Abstract

This research employs a relatively new type of market data, the credit default swaps (CDSs) values, to study the impact of public debt and market perceptions of default from an international perspective. Using a sample of 57 sovereign countries over five years, we find that sovereign external debt is positively associated with the implied cumulative probability of default (CPD). We further find that credit rating scores, economic growth, and cash surpluses are inversely related to CPD, while the change in the inflation rate and government size have a positive correlation with CPD. The findings clarify the relative role of the debt burden in predicting market perceived default risk.