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Who Saw Sovereign Debt Crises Coming?

Author

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  • Sebastián Nieto Parra

    (OECD)

Abstract
This paper studies sovereign debt crises during the period 1993-2006 through the prism of the primary sovereign bond market. Two conclusions emerge. First, investment banks price sovereign default risk well before crises occur and before investors detect default risk. Between three and one years prior to the onset of a crisis, sovereign default risk countries paid to investment banks on average 1.10 per cent of the amount issued, close to double the average paid by emerging countries overall in the same period (0.56 per cent). In contrast, the level of sovereign bond spreads prior to crises is on average only slightly higher than for emerging countries (385 vs. 319 basis points), suggesting that investment banks have an information advantage with respect to investors and are the only parties compensated for the risk of sovereign debt crises. Second, investment banks’ behaviour differs depending on the type of sovereign debt crisis. Before crises, investment banks charged on average a higher underwriting fee to countries presenting public finances difficulties than to other sovereign debt crisis countries. The robustness of these results is verified through panel data analysis. The results are puzzling in that they indicate that valuable, publicly available information is not tracked by investors to help improve allocation of their emerging market fixed income assets. Cet article a pour objectif d’analyser les crises de dette souveraine pendant la période 1993-2006 à partir du marché primaire souverain. Deux principales conclusions ressortent de cette étude. Premièrement, les banques d’investissement évaluent les risques de défaut bien avant les crises et avant même que les investisseurs ne les anticipent. Un à trois ans avant le début de la crise, les pays qui présentent un risque de défaut souverain élevé commencent à verser, en moyenne, 1.10 pourcent des montants qu’ils émettent aux banques d’investissement, soit près du double du montant moyen que versent l’ensemble des pays émergents pendant la période de l’étude (0.56 pourcent). En revanche, ils bénéficient, avant le début des crises, des primes de risque qui ne sont que légèrement supérieures à celles du reste des pays émergents (385 contre 319 points de base). Ce résultat suggère que les banques d’investissement ont un avantage d’information par rapport aux investisseurs et qu’elles sont les seules à tirer profit du risque de crise de dette souveraine. Deuxièmement, le comportement des banques d’investissement diffère selon le type de crise. Avant les crises, elles prennent une commission de souscription plus élevée pour les pays qui présentent des difficultés en matière de finances publiques que pour le reste des pays qui ont connu une crise de dette souveraine. La robustesse de ces résultats est vérifiée à partir d’une analyse de données de panel. Ces résultats sont étonnants en ce qu’ils indiquent que les investisseurs n’utilisent pas l’information utile et publique à leur disposition pour améliorer l’allocation de leurs actifs en titres émis par les pays émergents. Mots clés: Information,

Suggested Citation

  • Sebastián Nieto Parra, 2008. "Who Saw Sovereign Debt Crises Coming?," OECD Development Centre Working Papers 274, OECD Publishing.
    • Handle: RePEc:oec:devaaa:274-en
    DOI: 10.1787/227642504346
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    Cited by:

    1. Marc Flandreau & Juan H. Flores & Norbert Gaillard & Sebastián Nieto-Parra, 2010. "The End of Gatekeeping: Underwriters and the Quality of Sovereign Bond Markets, 1815–2007," NBER Chapters, in: NBER International Seminar on Macroeconomics 2009, pages 53-92, National Bureau of Economic Research, Inc.
    2. R. Anton Braun & Tomoyuki Nakajima, 2011. "Making the Case for a Low Intertemporal Elasticity of Substitution," KIER Working Papers 788, Kyoto University, Institute of Economic Research.
    3. Jean-Marc Fournier & Manuel Bétin, 2018. "Sovereign defaults: Evidence on the importance of government effectiveness," OECD Economics Department Working Papers 1494, OECD Publishing.
    4. R. Anton Braun & Tomoyuki Nakajima, 2018. "Why Prices Don't Respond Sooner to a Prospective Sovereign Debt Crisis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 235-255, July.
    5. Flores Zendejas, Juan, 2015. "Capital Markets and Sovereign Defaults: A Historical Perspective," Working Papers unige:73325, University of Geneva, Paul Bairoch Institute of Economic History.
    6. Indalecio Perez & Pablo Castellanos & Jose Manuel Sanchez-Santos, 2013. "Risk premium as an economic policy objective: The Spanish case," Economics and Business Letters, Oviedo University Press, vol. 2(3), pages 94-104.
    7. Marc Flandreau & Juan Flores & Norbert Gaillard & Sebastian Nieto-Parra, 2011. "The Changing Role of Global Financial Brands in the Underwriting of Foreign Government Debt (1815-2010)," IHEID Working Papers 15-2011, Economics Section, The Graduate Institute of International Studies.
    8. Werner, Richard A., 2014. "Enhanced Debt Management: Solving the eurozone crisis by linking debt management with fiscal and monetary policy," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 443-469.

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    More about this item

    Keywords

    commission de souscription; crises de dette souveraine; information; information; marché primaire souverain; primary bond market; sovereign debt crises; underwriter spread;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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