Why Do Emerging Economies Borrow Short Term?

The authors argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long-term debt. They first present a model where the debt maturity structure is the outcome of a risk-sharing probl...

Full description

Bibliographic Details
Main Authors: Broner, Fernando A., Lorenzoni, Guido, Schmukler, Sergio L.
Format: Policy Research Working Paper
Language:English
en_US
Published: World Bank, Washington, D.C. 2013
Subjects:
Online Access:http://documents.worldbank.org/curated/en/2004/09/5119777/emerging-economies-borrow-short-term
http://hdl.handle.net/10986/14139
Description
Summary:The authors argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long-term debt. They first present a model where the debt maturity structure is the outcome of a risk-sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a liquidity crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a tradeoff between safer long-term borrowing and cheaper short-term debt. Second, the authors construct a new database of sovereign bond prices and issuance. They show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting toward shorter maturities. This suggests that changes in bondholders' risk aversion are important to understand emerging market crises.