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Anticipating Sovereign Debt Crises

In: When Sovereigns Go Bankrupt

Author

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  • Norbert Gaillard

Abstract

Chapter 4 studies the various tools that investors can use to discriminate among borrowers and forecast debt crises. Section 4.1 describes the traditional indicators of sovereign risk – bond yields and spreads as well as ratings provided by Fitch, Moody’s, Standard & Poor’s (S&P), and Euromoney Country Risk (ECR) – and identifies their determinants. It is worth noting that sovereign bond spreads reflect more than country-specific fundamentals; in contrast to other risk indicators, risk premiums are strongly affected by liquidity and market sentiment. Section 4.2 compares these various indicators. Credit rating agencies and ECR ratings are strongly correlated with one another, but their correlation with 1- and 10-year sovereign bond yields is relatively weak. Section 4.3 demonstrates that sovereign debtors must overcome seven types of risk in order to preserve their creditworthiness: natural disaster, geopolitical risk, institutional and political risk, economic risk, monetary and exchange rate risk, fiscal and tax-system risk, and debt-related risk.

Suggested Citation

  • Norbert Gaillard, 2014. "Anticipating Sovereign Debt Crises," SpringerBriefs in Economics, in: When Sovereigns Go Bankrupt, edition 127, chapter 0, pages 33-44, Springer.
    • Handle: RePEc:spr:spbchp:978-3-319-08988-1_4
    DOI: 10.1007/978-3-319-08988-1_4
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