Abstract
We document that the corporate sector faces higher borrowing costs when the external debt of the public sector is higher. By contrast, no significant relationship is found between domestic public debt and corporate borrowing costs. An increase in sovereign debt by one standard deviation from its sample mean is associated with 9% higher loan yield spreads. The correlation is considerably higher in countries with weak creditor rights and past sovereign default episodes. Overall, these findings suggest substantial adverse linkages between public external debt and private financing costs.
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