The Impact of the Global Financial Safety Net on Emerging Market Bond Spreads

Abstract

Following the 2007–2008 global financial crisis, it became evident that there was a need for a strengthening of the global financial safety net (GFSN). The manner in which this should be achieved became a polarising issue of debate in international institutions such as the International Monetary Fund and the G20. Empirical evidence concerning the impact of the GFSN remains scarce. Therefore, this paper seeks to contribute to the debate by investigating the potential impacts that the various layers of the GFSN can have on sovereign borrowing costs in emerging markets. This analysis first reviews the common methodologies that can be found in the literature concerned with identifying determinants of foreign currency sovereign spreads in emerging markets. The analysis is then expanded to include elements of the GFSN. The results indicate that whilst the liquidity buffers provided by the overall GFSN appear to lower sovereign spreads, the impact of individual layers of the safety net is more ambiguous.