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...
Main Authors: | , , |
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Format: | Policy Research Working Paper |
Language: | English en_US |
Published: |
World Bank, Washington, D.C.
2013
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Subjects: | |
Online Access: | http://documents.worldbank.org/curated/en/2004/09/5119777/emerging-economies-borrow-short-term http://hdl.handle.net/10986/14139 |
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. |
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