Determinants of Spreads on Sovereign Bank Loans: The Role of Credit History
29 Pages Posted: 18 Nov 2005
Date Written: November 2005
Abstract
This paper is an empirical investigation into the role of credit history in determining the spread on sovereign bank loans. It employs an error-in-variables approach used in rational-expectations-macro-econometrics to set up a structural model that links sovereign loan spreads to realized repayment behavior. Unlike the existing empirical literature, its instrumental variables method allows for distinguishing a direct influence of past repayment problems (a "pure reputation" effect) from one that goes through increased default probabilities. Using developing country data from the period 1973-1981 and constructing continuous variables for credit history, we find that past default is a significant determinant of the spread, even after including country fixed effects. Moreover, its reduced-form effect is very similar to its structural form effect, indicating that most of the influence of past repayment problems is through the reputation channel. Overall, past and predicted future default are substantial determinants of sovereign bank loan spreads.
Keywords: reputation, sovereign bank loan spreads, default risk, rational expectations
JEL Classification: F30, F34, G12, G14, G15
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Richard Cantor and Frank Packer
-
What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?
By Barry Eichengreen and Ashoka Mody
-
The Evolution and Determinants of Emerging Market Credit Spreads in the 1990s
-
Ldc's Foreign Borrowing and Default Risk: an Empirical Investigation
-
The Evolution and Determinants of Emerging Markets Credit Spreads in the 1990s
-
Ldc Borrowing with Default Risk
By Jeffrey D. Sachs and Daniel Cohen
-
Determinants of Emerging Market Bond Spread: Do Economic Fundamentals Matter?
By Hong G. Min
-
By Barry Eichengreen and Ashoka Mody
-
By Barry Eichengreen and Ashoka Mody