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Financial stress and the probability of sovereign default

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  • Rho, Caterina
  • Saenz, Manrique

Abstract

Economic vulnerabilities may remain latent for long periods and may only reveal their full impact on a country’s fiscal sustainability when the economy undergoes a significant shock. This could lead researchers to understate the impact of such vulnerabilities on a country’s probability of sovereign default, particularly at times of global or local financial stress. We analyze data from a panel of 113 countries over the period 1990–2014 to examine the impact of debt burden indicators and macro fundamentals on risk of sovereign default in emerging markets and advanced economies. We test whether economic fundamentals and fiscal vulnerabilities have a stronger impact on the risk of sovereign default during periods of financial distress than during tranquil times. We find that financial stress significantly amplifies the impact of the debt-to-GDP ratio, the stock of international reserves, and GDP per capita on the probability of sovereign default.

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  • Rho, Caterina & Saenz, Manrique, 2021. "Financial stress and the probability of sovereign default," Journal of International Money and Finance, Elsevier, vol. 110(C).
    • Handle: RePEc:eee:jimfin:v:110:y:2021:i:c:s0261560620302618
    DOI: 10.1016/j.jimonfin.2020.102305
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    2. Kiss, Gábor Dávid & Alipanah, Sabri, 2024. "Sovereign spread divergence owing to inflation and redenomination risk countered by unconventional monetary policy in the Eurozone," Economic Modelling, Elsevier, vol. 131(C).
    3. Ghosh, Indranil & Jana, Rabin K. & David, Roubaud & Grebinevych, Oksana & Wanke, Peter & Tan, Yong, 2024. "Modelling financial stress during the COVID-19 pandemic: Prediction and deeper insights," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 680-698.
    4. Marta Gómez-Puig & Mary Pieterse-Bloem & Simón Sosvilla-Rivero, 2022. ""Dynamic connectedness between credit and liquidity risks in EMU sovereign debt markets"," IREA Working Papers 202217, University of Barcelona, Research Institute of Applied Economics, revised Oct 2022.
    5. Kuang-Hua Hu & Shih-Kuei Lin & Yung-Kang Ching & Ming-Chin Hung, 2021. "Goodness-of-Fit of Logistic Regression of the Default Rate on GDP Growth Rate and on CDX Indices," Mathematics, MDPI, vol. 9(16), pages 1-14, August.
    6. Kanno, Masayasu, 2024. "Assessing the impact of the COVID-19 crisis on sovereign default risk," Research in International Business and Finance, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    Sovereign debt sustainability; Financial stress; Banking crisis; International financial markets;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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