External Sovereign Debt Research Articles

Odious Debt.

Public international law does not encompass external sovereign debt. In particular, the current status of 'odious debt', which may also be termed 'illegitimate debt', in international law epitomizes the weakness of international law with respect to external sovereign debt. Odious debt is subject to politics and ad hoc relations on the international stage. By and large, the law engages with external sovereign debt on the national level-e.g., via the national laws and the national courts of financial centers. In the event of a dispute regarding external sovereign debt, it is very rare that international law or international adjudication deal with external sovereign debt.

Testing the impact of external sovereign debt on Turkey’s ecological footprint: New evidence from the bootstrap ARDL approach

As is glaringly apparent, the world is now bedeviled with environmental challenges and ecological complications. This may not be unconnected with the persistent ecological challenges emanating from fossil fuel consumption and changing lifestyles. This is why various attempts are ongoing to advance the course of renewable energy and economic growth as a response to environmental change. Therefore, this study seeks to investigate the dynamic effect of external debt, energy usage, and real income on the ecological footprint in Turkey, covering the period 1985–2017. To achieve the stated objective, the study used the newly developed Bootstrap Autoregressive Distributed Lag (BARDL) test and the Granger causality test to unravel the co-movement as well as the direction of causality among the variables. The results revealed that external debt influences environmental quality in both the short and the long run. However, energy consumption and real income have been found to have retarded environmental quality in both the short and the long run. The Granger causality test results revealed that the causal flow direction runs from external debt, economic growth, and energy usage to environmental quality. Therefore, the study argues that for the Turkish government to achieve a long-term plan of environmental sustainability, there is a need for the government to venture into debt consolidation programs such as implementing tax increases and cutting public spending in order to increase fiscal space that would finance long-term environmental protection policies.

Does high external debt predict lower economic growth? Role of sovereign spreads and institutional quality

There has been a lengthy debate regarding the relationship between external borrowing and macroeconomic fragility. This paper investigates the predictive power of external debt as an indicator for economic growth to examine the argument that there is a dynamic relationship between external debt and growth. We conduct a panel regression using data from low- and middle-income countries (LMCs) between 1970 and 2018. The results indicate that an increase in total, long-term, or external public debt consistently predicts slowdowns in short- and medium-run growth. Limited evidence on non-linear external debt-growth relationship highlights the fact that external borrowing, especially by the public sector, significantly contributes to macroeconomic fragility. Proxy vector autoregressive (PVAR) estimation also confirms the dynamic causal effect of external sovereign debt expansion on economic slowdowns. Further evidence suggests that even the countries have high borrowing costs, better institutional quality can help mitigate the negative impact of external borrowing on growth.

Investor sentiment and sovereign bonds

Investor sentiment is an important driver of sovereign bond returns in emerging markets. Using local sovereign debt and external sovereign debt, this paper finds that sentiment is negatively related to future bond returns on average across emerging market countries. This negative sentiment effect suggests that investors treat emerging market sovereign bonds as risky assets rather than as safe assets. This paper further finds that this sentiment effect is relatively stronger when liquidity frictions are higher, which is consistent with illiquid bonds being generally harder to arbitrage.

Covered Interest Rate Parity Deviations in External Emerging Market Sovereign Debt

Non-US dollar denominated external emerging market debt issuance in euros, yen, and sterling has grown substantially in recent years. This article is the first study to explore how non-dollar external emerging market bonds violate covered interest rate parity relative to their dollar-denominated external emerging market debt counterpart bonds for a given country. Such mispricing in the post-Great Recession era creates arbitrage opportunities for investors and suggests that emerging market country policymakers could create fiscal savings by instead issuing external sovereign debt in dollars more cheaply (versus non-dollar developed world currencies like euro, yen, and sterling) and swapping the proceeds to non-dollar currencies with currency forward and spot transactions. Such hypothetical fiscal savings from switching to dollar funding collectively are estimated to be more than $1 billion annually. TOPICS:Fixed income and structured finance, exchanges/markets/clearinghouses, emerging markets Key Findings • This article is the first study to explore how non-dollar external emerging market bonds violate covered interest rate parity relative to their dollar-denominated external emerging market debt counterpart bonds for a given country. • Such mispricing creates investment opportunities and suggests that by instead more cheaply issuing external sovereign debt in dollars (versus non-dollar developed world currencies like euro, yen, and sterling) and swapping the proceeds to non-dollar currencies, emerging market country policymakers could create substantial fiscal savings from switching to dollar funding.

The impact of external sovereign debt and the transmission effect of the US interest rate on Turkey’s equity market

ABSTRACTThe main objective of this study is to examine the dynamic impacts of external sovereign debt and the transmission effect of the US interest rate on Turkey’s equity market. Autoregressive Distributed Lag (ARDL) model is used to test the long-run coefficients between the variables. Gregory-Hansen with one structural break (SB), Hatemi-J cointegration tests with two (SB), and the recently developed Bayer-Hanck (BH) combined co-integration tests are used to confirm robustness of the ARDL bounds test. Moreover, the Granger causality test is applied to examine the causality direction among the variables. The results showed empirical evidence that the Turkish equity market was negatively affected by the external sovereign debt. Furthermore, the results provided a strong evidence of the spillover effects of the US interest rate on Turkey’ equity market through the local interest rate and external sovereign debt channels. These findings suggest that the Turkish policy makers are required to design plans to avoid any undesirable impacts of the spillover effects of the external debt and foreign interest rates policies on equity market in order to maintain stability.

Covered Interest Rate Parity Deviations In External Emerging Market Sovereign Debt

Non-U.S. dollar denominated external emerging market debt issuance in euros, yen, and sterling has grown substantially in recent years. This paper is the first study to explore how non-dollar external emerging market bonds violate covered interest rate parity relative to their dollar-denominated external emerging market debt counterpart bonds for a given country. Such mispricing in the post-Great Recession era creates arbitrage opportunities for investors and suggests that emerging market country policymakers could create fiscal savings by instead more cheaply issuing external sovereign debt in dollars (versus non-dollar developed world currencies like euro, yen, and sterling) and swapping the proceeds to non-dollar currencies with currency forward and spot transactions. Such hypothetical fiscal savings from switching to dollar funding collectively are estimated to be more than $1 billion annually.

The Gendered Consequences of Financial Crises: A Cross-National Analysis

What effects do financial crises have on women's well-being? While much research has addressed various socio-economic and political consequences of financial crises, the gendered impact of financial crises are empirically underexplored. Moreover, extant literature has mainly focused on specific crises or countries with little attempt at determining possible common effects and patterns across the world. To provide broader insight into the gendered consequences of financial crises, we examined the degree to which five types of financial crises—banking crises, currency crises, domestic sovereign debt crises, external sovereign debt crises, and inflation crises—affect women's health and educational outcomes as well as their participation in the formal economy and politics. We also examined the persistence of these effects in the postcrisis years. The results from a panel of 68 countries for the years 1980 to 2010 indicate that financial crises undermine women's participation in the formal workforce, their presence in politics, their educational attainment, and their health outcomes. We also found significant lingering effects of financial crises: the deleterious gendered effects of crises persist even seven years after the end of a crisis.

Domestic and External Sovereign Debt

Why do countries tend to repay their domestic and external debt, even though the legal enforcement of the sovereign debt contract is limited? Contrary to conventional wisdom, we argue that temporary market exclusion after default is costly. When the domestic financial market is characterized by a scarcity of private saving instruments, a government can partition its debt market into domestic and external segments, by restricting capital flows, to exploit its market power. The government's market power mitigates the problem of limited commitment, by making default a more costly option. Consequently, it extends the government's external debt capacity. We replicate the domestic and external sovereign debt for non-advanced economies, by unveiling their link to financial repression.

Domestic and External Sovereign Debt

Why do countries tend to repay their domestic and external debt, even though the legal enforcement of the sovereign debt contract is limited? Contrary to conventional wisdom, we argue that temporary market exclusion after default is costly. When the domestic financial market is characterized by a scarcity of private saving instruments, a government can partition its debt market into domestic and external segments, by restricting capital flows, to exploit its market power. The government's market power mitigates the problem of limited commitment, by making default a more costly option. Consequently, it extends the government's external debt capacity. We replicate the domestic and external sovereign debt for non-advanced economies, by unveiling their link to financial repression.

Hungry for Change: Urban Bias and Autocratic Sovereign Default

AbstractWhat drives autocrats to default on their sovereign debt? This article develops the first theory of sovereign debt default in autocracies that explicitly investigates survival incentives of political actors in nondemocracies. Self-interested elites, fearful of threats to their tenure because of urban unrest, may be willing to endure the long-term borrowing costs that defaulting creates rather than risk the short-term survival costs of removing cheap food policies for urban consumers. I test my main claims that both urbanization and food imports should be associated with greater likelihood of autocratic default using panel data covering forty-three countries over fifty years, finding that autocracies that are more reliant on imported food and that are more urbanized are significantly more likely to be in default on their external sovereign debt. I emphasize the regime-contingent nature of these effects by demonstrating that they are reversed when considering democratic sovereign default. I also substantiate the mechanisms put forward in my theory through illustrative historical cases of sovereign debt default in Zambia and Peru, in which I demonstrate that fear of urban unrest in the face of rapidly increasing food prices did indeed drive autocratic elites to default on international debt obligations. In addition to providing the first political theory of debt default in autocracies, the article introduces two robust predictors of autocratic default that have been overlooked in previous work, and highlights the importance of urban-rural dynamics in nondemocratic regimes.

Growth, Liquidity Provision, International Reserves, and Sovereign Debt Capacity

I establish a theoretical framework to address three distinct, but interrelated puzzles in international economics: (1) the occurrence of twin crises, (2) the existence of large amounts of sovereign debt, and (3) the presence of substantial amounts of international reserves. By considering the interaction between growth and banking in a small open economy that is unable to commit to repaying its external sovereign debt, my dynamic stochastic general equilibrium (DSGE) model uses Global Games techniques to study the endogenous relationship between domestic bank runs, sovereign debt capacity, international reserves, growth, and macroeconomic fundamentals. The main ndings are as follows. First, when excluded from international credit markets, liquidity demands rise in a country’s domestic banking sector, which raise the probability of bank runs and costs of liquidation of long term projects. This creates incentives for repayment and sovereign debt capacity. Second, twin (domestic) banking and (external) sovereign debt crises endogenously emerge within the model. Third, international reserves have \war chest like properties within the model: they help prevent domestic bank runs, during which incentives for a country to strategically default increase, and can therefore create sovereign debt capacity. Finally, my model can quantitatively generate reasonable amounts of sovereign debt and international reserves in equilibrium.

The stock of external sovereign debt: Can we take the data at ‘face value’?

The stock of sovereign debt is typically measured at face value. Defined as the undiscounted sum of future principal repayments, face values are misleading when debts are issued with different contractual forms or maturities. In this paper, we construct alternative measures of the stock of external sovereign debt for 100 developing countries from 1979 through 2006 that correct for differences in contractual form and maturity. We show that our alternative measures: (1) paint a very different quantitative, and in some cases also qualitative, picture of the stock of developing country external sovereign debt; (2) often invert rankings of indebtedness across countries, which historically defined eligibility for debt forgiveness; (3) indicate that the empirical performance of the benchmark quantitative model of sovereign debt deteriorates by roughly 50% once model-consistent measures of debt are used; (4) show how the spread of aggregation clauses in debt contracts that award creditors voting power in proportion to the contractual face value may introduce inefficiencies into the process of restructuring sovereign debts; and (5) illustrate how countries have manipulated their debt issuance to meet fiscal targets written in terms of face values.

A Critical Appraisal of the Sovereign Debt Crisis in India and the United States: A Comparative Study

Problem Statement: Traditionally the analysis of sovereign debt in developing economies has focused on external debt. However, in recent years, several developing countries have adopted aggressive policies to remove the external sovereign debt, replacing it by the country issued debt. This study is an attempt to examine the level of indebtedness of the Government of India with special reference to the United States. Further, it seeks to determine the effects of the sovereign debt crisis emanating from the United States on a developing economy like India. The study also examines the possible compromise between the internal and external borrowing and whether a switch to domestic borrowing can play a positive role in reducing the risks of sovereign finance. Approach: To achieve the same the research methodology adopted is primarily doctrinal wherein most of information is collected from secondary sources and authoritative reports from the World Bank, International Monetary Fund, Reserve Bank of India annual report and other scholarly writings by leading policy makers and economists. Results: The research documents that since the domestic economy in India is not isolated from the global economy, there will certainly be a few jerks felt in India. Both imports and exports will be affected. Exports from India to the United States, especially IT services, will issue an impact. The study also shows that since the beginning of the financial crisis in industrial countries sovereign debt has increased dramatically and they are set to continue increasing for the foreseeable future. Furthermore our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking and currency crisis. Conclusion: The path pursued by the tax authorities in a number of industrial countries is unsustainable. The Privatization program is one of the most attractive answers to the question of reducing the sovereign debt. This paper suggests that the traditional dichotomy between external and domestic debt does not make much sense in a world of open capital accounts and that, although the recent switch to domestic borrowing has important positive implications for debt management, policy makers should not be too complacent.

The Stock of External Sovereign Debt: Can We Take the Data at Face Valuee?

The stock of sovereign debt is typically measured at face value. Defined as the undiscounted sum of future principal repayments, face values are misleading when debts are issued with different contractual forms or maturities. In this paper, we construct alternative measures of the stock of external sovereign debt for 100 developing countries from 1979 through 2006 that correct for differences in contractual form and maturity. We show that our alternative measures: (1) paint a very different quantitative, and in some cases also qualitative, picture of the stock of developing country external sovereign debt; 2) often invert rankings of indebtedness across countries, which historically defined eligibility for debt forgiveness; (3) indicate that the empirical performance of the benchmark quantitative model of sovereign debt deteriorates by roughly 50% once model-consistent measures of debt are used; (4) show how the spread of aggregation clauses in debt contracts that award creditors voting power in proportion to the contractual face value may introduce inefficiencies into the process of restructuring sovereign debts; and (5) illustrate how countries have manipulated their debt issuance to meet fiscal targets written in terms of face values.

External Sovereign Debt in a Monetary Union: Bailouts and the Role of Corruption

We build a tractable stylized model of external sovereign debt and endogenous international interest rates. In corrupt economies with rent-seeking groups stealing public resources, a politico-economic equilibrium is characterized by permanent fiscal impatience which leads to excessive issuing of sovereign bonds. External creditors envision the corrupt economy’s fiscal impatience and buy its bonds at higher interest rates. In turn, this interest-rate increase exacerbates the problem of oversupplying debt, leading the economy to a perfect-foresight trap. In incorrupt countries which have entered a high-interest-rate/high debt-GDP-ratio trap because an immediately recent disaster has caused a sudden jump to a high outstanding debt-GDP ratio, we show that bailout plans with controlled interest rates can help in reducing debt-GDP ratios after some time. On the contrary, under corruption, we show that bailouts are ineffective unless rent-seeking groups are eradicated.

On Graduation from Default, Inflation, and Banking Crises: Elusive or Illusion?

This paper uses a data set of over two hundred years of sovereign debt, banking and inflation crises to explore the question of how long it takes a country to "graduate" from the typical pattern of serial crisis that most emerging markets experience. We find that for default and inflation crises, twenty years is a significant market, but the distribution of recidivism has extremely fat tails. In the case of banking crises, it is unclear whether countries ever graduate. We also examine the more recent phenomenon of IMF programs, which sometimes result in "near misses" but sometimes end in default even after a program is instituted. The paper raises the important theoretical question of why countries experience serial default, and how they might graduate.

Are Debt Crises Adequately Defined?

Crises on external sovereign debt are typically defined as defaults. Such a definition adequately captures debt-servicing difficulties in the 1980s, a period of numerous defaults on bank loans. However, defining defaults as debt crises is problematic for the 1990s, when sovereign bond markets emerged. Not only were there very few defaults in the 1990s, but liquidity indicators do not play any role in explaining defaults in this period. In order to overcome the resulting dearth of data on defaults and capture the evolution of debt markets in the 1990s, we define debt crises as events occurring when either a country defaults or its bond spreads are above a critical threshold. We find that, when information from bond markets is included, standard indicators—solvency and liquidity measures, as well as macroeconomic control variables—are significant.

Pathways Through Financial Crisis: Argentina

By the end of 2001, Argentina faced economic recession, a collapse in its banking system, and an external sovereign debt crisis. While preemptive action earlier in the year might have made one or more of these crises less severe, preemption was a political orphan at home and abroad. The country's long-standing relationship with the International Monetary Fund brought with it a mutual dependence: the IMF had come to embrace Argentina as a symbol of the success of its policy advice, and Argentina had come to rely on the IMF's endorsement and occasional financial support to navigate the choppy international markets. That relationship deepened along with Argentina's growing difficulties in the run-up to default. IMF support was used to put off a correction of the overvalued currency and to postpone a major debt restructuring. A new Argentine policy regime--and a new, more adversarial relationship with the IMF--emerged only after devaluation and default. KEYWORDS: Argentina, financial crises, banking crises, debt restructuring, International Monetary Fund. ********** Argentina's relationship with the International Monetary Fund (IMF) has been remarkably long-standing and intense. For fourteen of the twenty years preceding Argentina's crisis in 2000, its economic policy operated within an IMF program. Even after the initial success of its currency board arrangement and debt restructuring in the early 1990s, Argentina relied on the IMF's endorsement and occasional financing to navigate choppy international markets. As the IMF came under criticism for its handling of Asia's financial crisis, it set aside early doubts about Argentina's currency board arrangement and embraced the country as a symbol of the success of IMF policy advice. When external shocks left the Argentine peso overvalued at the end of the 1990s, neither Argentina's political system nor its relationship with the IMF could adjust successfully to a financial crisis that proved far deeper than either Argentina's elite or the IMF had recognized. Between 1999 and 2001, Argentina's economic slump transformed into a deep financial crisis. Two theories for Argentina's malaise dominated the policy debate. One held that Argentina was suffering from a crisis of confidence. Another held that the crisis was mostly fiscal. Both theories were too simplistic. They ignored the central importance of an overvalued currency and the heavy use of the dollar in domestic financial contracts. They also failed to recognize the extent to which the system (Argentina's currency board arrangement) had become an organizing device for Argentina's politics--not just an anchor for monetary policy--and how access to external financing had provided the critical glue that held together the political economy of convertibility. (1) Argentina's political system was unwilling to act preemptively to reduce the scale of what in many ways was an unavoidable crisis. At no time was there a political consensus to incur the costs of exiting convertibility immediately to avoid a bigger, deeper, and more costly exit later. Neither was there a consensus to shrink Argentina's economy and drive down wages and prices to abide by the constraints of a currency board, particularly once those constraints started to bite in the face of reduced capital inflows. Argentina's leaders preferred to hope that its difficulties were temporary: they drew on IMF financing, spent reserves, and then resorted to increasingly desperate attempts at financial engineering to postpone a payments crisis. Default and devaluation did not immediately bring political consensus on how to allocate financial pain. A desire to avoid probable losses transformed into an inability to allocate losses already incurred and demands for compensation from all sides. All the major players initially hoped that someone else would get stuck with the bill. The denouement of Argentina's crisis turned out to be as protracted as its buildup. …

Argentina's Pathway Through Financial Crisis

Political support for Argentina's currency board rested on distributing the early gains from ending hyper-inflation and the spending made possible with access to external credit. When these gains were exhausted and external shocks left the peso overvalued, neither Argentina's political system nor its economy could adjust. The needed adjustment went well beyond simple fiscal tightening: it required deciding who would incur the financial losses associated with the deep contraction needed to correct a real over-valuation in a heavily indebted economy. By 2000, Argentina faced the prospect of further economic contraction, a banking crisis and an external sovereign debt crisis. Even if none of the three crises was avoidable, preemptive action might have made one or more of them less severe. Yet preemption was a political orphan - no political constituency in Argentina argued to bring some pain forward for a chance of less pain down the road, and the IMF and G-7 preferred continued financing to the political risk of supporting a new macroeconomic strategy.