Local Currency Sovereign Risk

No 1094, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Do governments default on debt denominated in their own currency? We introduce a new measure of sovereign credit risk, the local currency credit spread, defined as the spread of local currency bonds over the synthetic local currency risk-free rate constructed using cross currency swaps. We find that local currency credit spreads are positive and sizable. Compared with credit spreads on foreign currency denominated debt, local currency credit spreads have lower means, lower cross-country correlations, and are less sensitive to global risk factors. Global risk aversion and liquidity factors can explain more time variation in these credit spread differentials than macroeconomic fundamentals.

Keywords: Local currency; sovereign debts; currency swaps (search for similar items in EconPapers)
JEL-codes: F31 F34 G15 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2013-12-10
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (7)

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Working Paper: Local Currency Sovereign Risk (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1094

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