scholarly journals Sudden Stops, Sovereign Risk, and Fiscal Rules

2021 ◽  
Author(s):  
Jose E. Gomez-Gonzalez ◽  
Oscar Valencia ◽  
Gustavo Sánchez
Keyword(s):  
Risk Perception ◽  
Default Risk ◽  
Emerging Market ◽  
Sovereign Default ◽  
Policy Implications ◽  
Fiscal Rules ◽  
Sovereign Risk ◽  
Sudden Stop ◽  
Large Sample ◽  
Sovereign Default Risk

This paper studies the effect of implementing fiscal rules on sovereign default risk and on the probability of large capital ow reversals for a large sample of countries including both developed and emerging market economies. Results indicate that fiscal rules are beneficial for macroeconomic stability, as they significantly reduce both sovereign risk perception and the probability of a sudden stop in countries that implement them. These results, which are robust to various empirical specifications, have important policy implications specially for countries that have relaxed their fiscal rules in response to the Covid-19 pandemic.

scholarly journals Sovereign Default Forecasting in the Era of the COVID-19 Crisis

2021 ◽  
Vol 14 (10) ◽  
pp. 494
Author(s):  
Tamás Kristóf
Keyword(s):  
Default Risk ◽  
Forecast Model ◽  
Sovereign Default ◽  
Policy Implications ◽  
Homogeneous Markov Chain ◽  
Multivariate Statistical ◽  
Sovereign Default Risk ◽  
Default Risks ◽  
Risk Forecast ◽  
The Impact

The COVID-19 crisis has revealed the economic vulnerability of various countries and, thus, has instigated the systematic exploration and forecasting of sovereign default risks. Multivariate statistical and stochastic process-based sovereign default risk forecasting has a 50-year developmental history. This article describes a continuous, non-homogeneous Markov chain method as the basis for a COVID-19-related sovereign default risk forecast model. It demonstrates the estimation of sovereign probabilities of default (PDs) over a five-year horizon period with the developed model reflecting the impact of the COVID-19 crisis. The COVID-19-adopted Markov model estimates PDs for most countries, including those that are advanced with AAA and AA ratings, to suggest that no sovereign nation’s economy is secure from the financial impact of the COVID-19 pandemic. The dynamics of the estimated PDs are indicative of contemporary evidence as experienced in the recent financial crisis. The empirical results of this article have policy implications for foreign investors, sovereign lenders, export finance institutions, foreign trade experts, risk management professionals, and policymakers in the field of finance. The developed model can be used to timely recognize potential problems with sovereign entities in the current COVID-19 crisis and to take appropriate mitigating actions.

scholarly journals Transparent and Unique Sovereign Default Risk Assessment

2014 ◽  
pp. 115-143
Author(s):  
Edward I. Altman ◽  
Herbert A. Rijken
Keyword(s):  
Default Risk ◽  
Sovereign Default ◽  
Probability Of Default ◽  
Z Score ◽  
Sovereign Risk ◽  
Financial Condition ◽  
Sovereign Default Risk ◽  
Sovereign Defaults ◽  
Nonfinancial Firms ◽  
Logical Extension

This chapter describes a novel, bottom-up approach for assessing the default risk of both sovereign governments and corporate issuers. Known as Z-Metrics™, the method is practical and effective for estimating sovereign risk. A logical extension of the Altman Z-Score technique that was introduced in 1968, Z-Metrics emphasizes the financial condition, profitability, and solvency of a nation’s private sector, including banks and nonfinancial firms. The chapter first considers financial crises to provide some historical perspective before reviewing the academic and practitioner literature on sovereign risk, particularly those studies that test the predictability of sovereign defaults and crises. It then introduces the Z-Metrics system for estimating the probability of default for individual (nonfinancial) companies and evaluates the effectiveness of calculating the median and 75th percentile company five-year probability of default of the sovereign’s nonfinancial corporate sector.

scholarly journals Pricing Sovereign Debt in Resource-Rich Economies

2019 ◽  
Vol 19 (240) ◽  
Author(s):  
Thomas McGregor
Keyword(s):  
Interest Rate ◽  
Default Risk ◽  
Sovereign Debt ◽  
Emerging Market ◽  
Sovereign Default ◽  
Oil Price ◽  
Risk Premiums ◽  
Sovereign Spreads ◽  
Sovereign Default Risk ◽  
Interest Rate Spreads

How do oil price movements affect sovereign spreads in an oil-dependent economy? I develop a stochastic general equilibrium model of an economy exposed to co-moving oil price and output processes, with endogenous sovereign default risk. The model explains a large proportion of business cycle fluctuations in interest-rate spreads in oil-exporting emerging market economies, particularly the countercyclicallity of interest rate spreads and oil prices. Higher risk-aversion, more impatient governments, larger oil shares and a stronger correlation between domestic output and oil price shocks all lead to stronger co-movements between risk premiums and the oil price.

scholarly journals ON THE ROLE OF DEBT MATURITY IN A MODEL WITH SOVEREIGN RISK AND FINANCIAL FRICTIONS

2017 ◽  
Vol 23 (5) ◽  
pp. 2114-2131
Author(s):  
Stéphane Auray ◽  
Aurélien Eyquem
Keyword(s):  
Public Debt ◽  
Default Risk ◽  
Financial Frictions ◽  
Sovereign Default ◽  
Debt Maturity ◽  
Sovereign Risk ◽  
Fiscal Consolidation ◽  
Positive Effects ◽  
Sovereign Default Risk

We develop a model with financial frictions and sovereign default risk wherein the maturity of public debt is allowed to be larger than one period. When the debt portfolio has longer average maturities, public debt increases less in the event of a crisis, reducing the size of the subsequent fiscal consolidation through distorsionary taxes or public spending, with positive effects on welfare. In addition, we provide some results suggesting that optimized fiscal responses to a crisis depend on the average maturity of the debt portfolio.

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