Sovereign Debt Distress and Corporate Spillover Impacts
In much of the standard corporate finance literature in which sovereign debt is treated as a risk free asset, corporate bond prices are seen to depend on idiosyncratic risk factors specific to the issuing company, with public debt playing an indire...
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| Format: | Policy Research Working Paper |
| Language: | English |
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2012
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| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100726102657 http://hdl.handle.net/10986/3864 |
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okr-10986-3864 |
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| recordtype |
oai_dc |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
ACTIVE MARKET ASSET CLASS BALANCE OF PAYMENTS BALANCE OF PAYMENTS CRISIS BALANCE SHEETS BANK BALANCE SHEET BANK CREDIT BANK LOAN BANK LOANS BANKING MARKET BANKING SYSTEM BASIS POINTS BOND HOLDERS BOND INSTRUMENTS BOND ISSUANCE BOND ISSUERS BOND MARKET BOND PRICE BOND PRICES BOND RATING BOND SPREAD BOND SPREADS BOND VALUATION BOND YIELD BONDHOLDERS BONDS BORROWER BUSINESS CYCLE BUYBACK BUYBACKS CAPITAL FLOWS CAPITAL MARKET CAPITAL MARKET DEVELOPMENT CASH FLOW CASH FLOWS CDS COLLATERALIZATION COLLECTIVE ACTIONS COLLECTIVE ACTIONS CLAUSES COMMODITY PRICES CORPORATE BOND CORPORATE BOND ISSUANCE CORPORATE BOND ISSUANCES CORPORATE BOND MARKET CORPORATE BONDS CORPORATE BORROWERS CORPORATE CREDIT RISK CORPORATE DEBT CORPORATE DEFAULT CORPORATE GOVERNANCE CORPORATE MARKET CORPORATE SECURITIES COUNTRY CREDIT COUNTRY RISK COUPON CREDIT AGENCIES CREDIT DEFAULT CREDIT DEFAULT SWAP CREDIT DERIVATIVES CREDIT RATINGS CREDIT RISK CREDIT RISK ASSESSMENT CREDIT RISKS CREDIT SPREADS CREDITORS CREDITWORTHINESS CURRENCY CURRENCY CRISES DEBT CAPITAL DEBT CONTRACT DEBT CRISIS DEBT ISSUANCE DEBT ISSUERS DEBT MANAGEMENT DEBT OBLIGATION DEBT OBLIGATIONS DEBT OUTSTANDING DEBT RESTRUCTURING DEBT SERVICING DEBTOR DEBTOR COUNTRIES DEFAULT INFORMATION DEFAULT PROBABILITY DEFAULT RISK DEFAULTS DEVALUATION DEVELOPING COUNTRIES DISPUTE RESOLUTION DOMESTIC BANKS DUMMY VARIABLE ECONOMIC DEVELOPMENT EMERGING BOND MARKET EMERGING ECONOMIES EMERGING MARKET EMERGING MARKET BOND EMERGING MARKET ECONOMIES EMERGING MARKETS EQUITY MARKETS EQUITY PRODUCTS EUROBOND EXTERNAL BORROWING EXTERNAL DEBT FACE VALUE FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL DEVELOPMENT FINANCIAL DISTRESS FINANCIAL HEALTH FINANCIAL INSTITUTIONS FINANCIAL MARKET FINANCIAL MARKETS FINANCIAL STRESS FISCAL POLICY FIXED EXCHANGE RATE FLOATING RATE FLOATING RATE NOTES FOREIGN BANK FOREIGN CAPITAL FOREIGN CURRENCY FOREIGN CURRENCY DEBT FOREIGN CURRENCY LOAN FOREIGN DEBT FOREIGN INVESTORS FOREIGNCURRENCY FREE ASSET GLOBAL BOND GLOBAL BOND MARKETS GLOBAL BUSINESS GLOBAL CAPITAL GLOBAL CAPITAL MARKETS GLOBAL MARKETS GOVERNMENT DEBT GOVERNMENT GUARANTEES GOVERNMENT SECURITIES GOVERNMENT SUPPORT HIGH-YIELD BOND INFLATION INSTITUTIONAL DEVELOPMENT INTEREST RATE INTERNATIONAL BANK INTERNATIONAL BANKING INTERNATIONAL BOND INTERNATIONAL BOND MARKETS INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL MARKETS INTERNATIONAL DEBT INTERNATIONAL DEBT MARKETS INTERNATIONAL INTEREST INTERNATIONAL MARKETS INVESTOR CONFIDENCE ISSUANCE ISSUANCES LIABILITY LIABILITY MANAGEMENT LIQUIDATION LIQUIDITY LOAN LOAN DATA LOAN MARKET LOAN MARKETS LOCAL CURRENCIES LOCAL FINANCE LONG-TERM INVESTMENT MACROECONOMIC CONDITIONS MACROECONOMIC RISKS MACROECONOMIC VARIABLES MARKET BORROWERS MARKET BORROWINGS MARKET CONDITIONS MARKET CONSTRAINTS MARKET DEBT MARKET DEVELOPMENT MARKET FINANCE MARKET PRACTICE MARKET PRICE MARKETABLE BOND MATURITY MONETARY POLICY PAYMENT OBLIGATION POLITICAL RISK PRIVATE BOND PRIVATE BORROWERS PRIVATE BORROWING PRIVATE CORPORATE DEBT PRIVATE CREDIT PRIVATE DEBT PUBLIC DEBT PUBLIC FINANCES RETURN RISK AVERSION RISK EXPOSURE RISK FACTORS RISK PREMIUMS RISKY ASSET SAFETY NET SECONDARY MARKET SMALL BUSINESSES SOVEREIGN BOND SOVEREIGN BOND MARKET SOVEREIGN BOND MARKETS SOVEREIGN BONDS SOVEREIGN DEBT SOVEREIGN DEBT PROBLEMS SOVEREIGN DEFAULT SOVEREIGN DEFAULTS SOVEREIGN ENTITY SOVEREIGN ISSUERS SOVEREIGN RISK SWAP SWAPS T-BOND TERM STRUCTURE OF INTEREST RATES TRANSPARENCY TREASURY TREASURY BOND TREASURY BOND YIELD TREASURY SECURITIES TREASURY SECURITY VALUATION VALUE OF ASSETS WARRANTS YIELD SPREADS |
| spellingShingle |
ACTIVE MARKET ASSET CLASS BALANCE OF PAYMENTS BALANCE OF PAYMENTS CRISIS BALANCE SHEETS BANK BALANCE SHEET BANK CREDIT BANK LOAN BANK LOANS BANKING MARKET BANKING SYSTEM BASIS POINTS BOND HOLDERS BOND INSTRUMENTS BOND ISSUANCE BOND ISSUERS BOND MARKET BOND PRICE BOND PRICES BOND RATING BOND SPREAD BOND SPREADS BOND VALUATION BOND YIELD BONDHOLDERS BONDS BORROWER BUSINESS CYCLE BUYBACK BUYBACKS CAPITAL FLOWS CAPITAL MARKET CAPITAL MARKET DEVELOPMENT CASH FLOW CASH FLOWS CDS COLLATERALIZATION COLLECTIVE ACTIONS COLLECTIVE ACTIONS CLAUSES COMMODITY PRICES CORPORATE BOND CORPORATE BOND ISSUANCE CORPORATE BOND ISSUANCES CORPORATE BOND MARKET CORPORATE BONDS CORPORATE BORROWERS CORPORATE CREDIT RISK CORPORATE DEBT CORPORATE DEFAULT CORPORATE GOVERNANCE CORPORATE MARKET CORPORATE SECURITIES COUNTRY CREDIT COUNTRY RISK COUPON CREDIT AGENCIES CREDIT DEFAULT CREDIT DEFAULT SWAP CREDIT DERIVATIVES CREDIT RATINGS CREDIT RISK CREDIT RISK ASSESSMENT CREDIT RISKS CREDIT SPREADS CREDITORS CREDITWORTHINESS CURRENCY CURRENCY CRISES DEBT CAPITAL DEBT CONTRACT DEBT CRISIS DEBT ISSUANCE DEBT ISSUERS DEBT MANAGEMENT DEBT OBLIGATION DEBT OBLIGATIONS DEBT OUTSTANDING DEBT RESTRUCTURING DEBT SERVICING DEBTOR DEBTOR COUNTRIES DEFAULT INFORMATION DEFAULT PROBABILITY DEFAULT RISK DEFAULTS DEVALUATION DEVELOPING COUNTRIES DISPUTE RESOLUTION DOMESTIC BANKS DUMMY VARIABLE ECONOMIC DEVELOPMENT EMERGING BOND MARKET EMERGING ECONOMIES EMERGING MARKET EMERGING MARKET BOND EMERGING MARKET ECONOMIES EMERGING MARKETS EQUITY MARKETS EQUITY PRODUCTS EUROBOND EXTERNAL BORROWING EXTERNAL DEBT FACE VALUE FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL DEVELOPMENT FINANCIAL DISTRESS FINANCIAL HEALTH FINANCIAL INSTITUTIONS FINANCIAL MARKET FINANCIAL MARKETS FINANCIAL STRESS FISCAL POLICY FIXED EXCHANGE RATE FLOATING RATE FLOATING RATE NOTES FOREIGN BANK FOREIGN CAPITAL FOREIGN CURRENCY FOREIGN CURRENCY DEBT FOREIGN CURRENCY LOAN FOREIGN DEBT FOREIGN INVESTORS FOREIGNCURRENCY FREE ASSET GLOBAL BOND GLOBAL BOND MARKETS GLOBAL BUSINESS GLOBAL CAPITAL GLOBAL CAPITAL MARKETS GLOBAL MARKETS GOVERNMENT DEBT GOVERNMENT GUARANTEES GOVERNMENT SECURITIES GOVERNMENT SUPPORT HIGH-YIELD BOND INFLATION INSTITUTIONAL DEVELOPMENT INTEREST RATE INTERNATIONAL BANK INTERNATIONAL BANKING INTERNATIONAL BOND INTERNATIONAL BOND MARKETS INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL MARKETS INTERNATIONAL DEBT INTERNATIONAL DEBT MARKETS INTERNATIONAL INTEREST INTERNATIONAL MARKETS INVESTOR CONFIDENCE ISSUANCE ISSUANCES LIABILITY LIABILITY MANAGEMENT LIQUIDATION LIQUIDITY LOAN LOAN DATA LOAN MARKET LOAN MARKETS LOCAL CURRENCIES LOCAL FINANCE LONG-TERM INVESTMENT MACROECONOMIC CONDITIONS MACROECONOMIC RISKS MACROECONOMIC VARIABLES MARKET BORROWERS MARKET BORROWINGS MARKET CONDITIONS MARKET CONSTRAINTS MARKET DEBT MARKET DEVELOPMENT MARKET FINANCE MARKET PRACTICE MARKET PRICE MARKETABLE BOND MATURITY MONETARY POLICY PAYMENT OBLIGATION POLITICAL RISK PRIVATE BOND PRIVATE BORROWERS PRIVATE BORROWING PRIVATE CORPORATE DEBT PRIVATE CREDIT PRIVATE DEBT PUBLIC DEBT PUBLIC FINANCES RETURN RISK AVERSION RISK EXPOSURE RISK FACTORS RISK PREMIUMS RISKY ASSET SAFETY NET SECONDARY MARKET SMALL BUSINESSES SOVEREIGN BOND SOVEREIGN BOND MARKET SOVEREIGN BOND MARKETS SOVEREIGN BONDS SOVEREIGN DEBT SOVEREIGN DEBT PROBLEMS SOVEREIGN DEFAULT SOVEREIGN DEFAULTS SOVEREIGN ENTITY SOVEREIGN ISSUERS SOVEREIGN RISK SWAP SWAPS T-BOND TERM STRUCTURE OF INTEREST RATES TRANSPARENCY TREASURY TREASURY BOND TREASURY BOND YIELD TREASURY SECURITIES TREASURY SECURITY VALUATION VALUE OF ASSETS WARRANTS YIELD SPREADS Dailami, Mansoor Sovereign Debt Distress and Corporate Spillover Impacts |
| geographic_facet |
The World Region The World Region |
| relation |
Policy Research working paper ; no. WPS 5380 |
| description |
In much of the standard corporate
finance literature in which sovereign debt is treated as a
risk free asset, corporate bond prices are seen to depend on
idiosyncratic risk factors specific to the issuing company,
with public debt playing an indirect role to the extent that
it affects the term structure of interest rates. In the
corporate world, however, the ability of a borrower to
access international capital markets and the terms according
to which it can raise capital depend not only on its own
creditworthiness, but also on the financial health of its
home-country sovereign. In times of financial stress, when
investors lose confidence in the government's ability
to use public finances to stabilize the economy or provide a
safety net for corporations in distress, markets'
assessment of private credit risk takes on a completely
different dynamic than during normal times, incorporating an
additional risk premium to compensate investors for the
potential consequences of sovereign default. Using a new
database that covers nearly every emerging-market corporate
and sovereign entity that has issued bonds on global markets
between 1995 and 2009, this paper investigates the degree to
which heightened sovereign default risk perceptions during
times of market turmoil influence the determination of
corporate bond yield spreads, controlling for specific bond
attributes and common global risk factors. Econometric
evidence presented confirms that investors' perceptions
of sovereign debt problems translate into higher costs of
capital for private corporate issuers, with the magnitude of
such costs increasing at times when sovereign bonds trade at
spreads exceeding a threshold of 1000 bps. The key policy
recommendation emerging from the analysis relates to the
need to improve sovereign creditworthiness in order to
prevent a loss in investor confidence that could trigger a
panicky sell-off in sovereign debt with adverse
macroeconomic and fiscal consequences. Implications for
future research point to the need to develop better models
of corporate bond pricing and valuation, recognizing
explicitly the role of sovereign credit risk. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Dailami, Mansoor |
| author_facet |
Dailami, Mansoor |
| author_sort |
Dailami, Mansoor |
| title |
Sovereign Debt Distress and Corporate Spillover Impacts |
| title_short |
Sovereign Debt Distress and Corporate Spillover Impacts |
| title_full |
Sovereign Debt Distress and Corporate Spillover Impacts |
| title_fullStr |
Sovereign Debt Distress and Corporate Spillover Impacts |
| title_full_unstemmed |
Sovereign Debt Distress and Corporate Spillover Impacts |
| title_sort |
sovereign debt distress and corporate spillover impacts |
| publishDate |
2012 |
| url |
http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100726102657 http://hdl.handle.net/10986/3864 |
| _version_ |
1764388733308633088 |
| spelling |
okr-10986-38642021-04-23T14:02:13Z Sovereign Debt Distress and Corporate Spillover Impacts Dailami, Mansoor ACTIVE MARKET ASSET CLASS BALANCE OF PAYMENTS BALANCE OF PAYMENTS CRISIS BALANCE SHEETS BANK BALANCE SHEET BANK CREDIT BANK LOAN BANK LOANS BANKING MARKET BANKING SYSTEM BASIS POINTS BOND HOLDERS BOND INSTRUMENTS BOND ISSUANCE BOND ISSUERS BOND MARKET BOND PRICE BOND PRICES BOND RATING BOND SPREAD BOND SPREADS BOND VALUATION BOND YIELD BONDHOLDERS BONDS BORROWER BUSINESS CYCLE BUYBACK BUYBACKS CAPITAL FLOWS CAPITAL MARKET CAPITAL MARKET DEVELOPMENT CASH FLOW CASH FLOWS CDS COLLATERALIZATION COLLECTIVE ACTIONS COLLECTIVE ACTIONS CLAUSES COMMODITY PRICES CORPORATE BOND CORPORATE BOND ISSUANCE CORPORATE BOND ISSUANCES CORPORATE BOND MARKET CORPORATE BONDS CORPORATE BORROWERS CORPORATE CREDIT RISK CORPORATE DEBT CORPORATE DEFAULT CORPORATE GOVERNANCE CORPORATE MARKET CORPORATE SECURITIES COUNTRY CREDIT COUNTRY RISK COUPON CREDIT AGENCIES CREDIT DEFAULT CREDIT DEFAULT SWAP CREDIT DERIVATIVES CREDIT RATINGS CREDIT RISK CREDIT RISK ASSESSMENT CREDIT RISKS CREDIT SPREADS CREDITORS CREDITWORTHINESS CURRENCY CURRENCY CRISES DEBT CAPITAL DEBT CONTRACT DEBT CRISIS DEBT ISSUANCE DEBT ISSUERS DEBT MANAGEMENT DEBT OBLIGATION DEBT OBLIGATIONS DEBT OUTSTANDING DEBT RESTRUCTURING DEBT SERVICING DEBTOR DEBTOR COUNTRIES DEFAULT INFORMATION DEFAULT PROBABILITY DEFAULT RISK DEFAULTS DEVALUATION DEVELOPING COUNTRIES DISPUTE RESOLUTION DOMESTIC BANKS DUMMY VARIABLE ECONOMIC DEVELOPMENT EMERGING BOND MARKET EMERGING ECONOMIES EMERGING MARKET EMERGING MARKET BOND EMERGING MARKET ECONOMIES EMERGING MARKETS EQUITY MARKETS EQUITY PRODUCTS EUROBOND EXTERNAL BORROWING EXTERNAL DEBT FACE VALUE FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL DEVELOPMENT FINANCIAL DISTRESS FINANCIAL HEALTH FINANCIAL INSTITUTIONS FINANCIAL MARKET FINANCIAL MARKETS FINANCIAL STRESS FISCAL POLICY FIXED EXCHANGE RATE FLOATING RATE FLOATING RATE NOTES FOREIGN BANK FOREIGN CAPITAL FOREIGN CURRENCY FOREIGN CURRENCY DEBT FOREIGN CURRENCY LOAN FOREIGN DEBT FOREIGN INVESTORS FOREIGNCURRENCY FREE ASSET GLOBAL BOND GLOBAL BOND MARKETS GLOBAL BUSINESS GLOBAL CAPITAL GLOBAL CAPITAL MARKETS GLOBAL MARKETS GOVERNMENT DEBT GOVERNMENT GUARANTEES GOVERNMENT SECURITIES GOVERNMENT SUPPORT HIGH-YIELD BOND INFLATION INSTITUTIONAL DEVELOPMENT INTEREST RATE INTERNATIONAL BANK INTERNATIONAL BANKING INTERNATIONAL BOND INTERNATIONAL BOND MARKETS INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL MARKETS INTERNATIONAL DEBT INTERNATIONAL DEBT MARKETS INTERNATIONAL INTEREST INTERNATIONAL MARKETS INVESTOR CONFIDENCE ISSUANCE ISSUANCES LIABILITY LIABILITY MANAGEMENT LIQUIDATION LIQUIDITY LOAN LOAN DATA LOAN MARKET LOAN MARKETS LOCAL CURRENCIES LOCAL FINANCE LONG-TERM INVESTMENT MACROECONOMIC CONDITIONS MACROECONOMIC RISKS MACROECONOMIC VARIABLES MARKET BORROWERS MARKET BORROWINGS MARKET CONDITIONS MARKET CONSTRAINTS MARKET DEBT MARKET DEVELOPMENT MARKET FINANCE MARKET PRACTICE MARKET PRICE MARKETABLE BOND MATURITY MONETARY POLICY PAYMENT OBLIGATION POLITICAL RISK PRIVATE BOND PRIVATE BORROWERS PRIVATE BORROWING PRIVATE CORPORATE DEBT PRIVATE CREDIT PRIVATE DEBT PUBLIC DEBT PUBLIC FINANCES RETURN RISK AVERSION RISK EXPOSURE RISK FACTORS RISK PREMIUMS RISKY ASSET SAFETY NET SECONDARY MARKET SMALL BUSINESSES SOVEREIGN BOND SOVEREIGN BOND MARKET SOVEREIGN BOND MARKETS SOVEREIGN BONDS SOVEREIGN DEBT SOVEREIGN DEBT PROBLEMS SOVEREIGN DEFAULT SOVEREIGN DEFAULTS SOVEREIGN ENTITY SOVEREIGN ISSUERS SOVEREIGN RISK SWAP SWAPS T-BOND TERM STRUCTURE OF INTEREST RATES TRANSPARENCY TREASURY TREASURY BOND TREASURY BOND YIELD TREASURY SECURITIES TREASURY SECURITY VALUATION VALUE OF ASSETS WARRANTS YIELD SPREADS In much of the standard corporate finance literature in which sovereign debt is treated as a risk free asset, corporate bond prices are seen to depend on idiosyncratic risk factors specific to the issuing company, with public debt playing an indirect role to the extent that it affects the term structure of interest rates. In the corporate world, however, the ability of a borrower to access international capital markets and the terms according to which it can raise capital depend not only on its own creditworthiness, but also on the financial health of its home-country sovereign. In times of financial stress, when investors lose confidence in the government's ability to use public finances to stabilize the economy or provide a safety net for corporations in distress, markets' assessment of private credit risk takes on a completely different dynamic than during normal times, incorporating an additional risk premium to compensate investors for the potential consequences of sovereign default. Using a new database that covers nearly every emerging-market corporate and sovereign entity that has issued bonds on global markets between 1995 and 2009, this paper investigates the degree to which heightened sovereign default risk perceptions during times of market turmoil influence the determination of corporate bond yield spreads, controlling for specific bond attributes and common global risk factors. Econometric evidence presented confirms that investors' perceptions of sovereign debt problems translate into higher costs of capital for private corporate issuers, with the magnitude of such costs increasing at times when sovereign bonds trade at spreads exceeding a threshold of 1000 bps. The key policy recommendation emerging from the analysis relates to the need to improve sovereign creditworthiness in order to prevent a loss in investor confidence that could trigger a panicky sell-off in sovereign debt with adverse macroeconomic and fiscal consequences. Implications for future research point to the need to develop better models of corporate bond pricing and valuation, recognizing explicitly the role of sovereign credit risk. 2012-03-19T18:41:10Z 2012-03-19T18:41:10Z 2010-07-01 http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100726102657 http://hdl.handle.net/10986/3864 English Policy Research working paper ; no. WPS 5380 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank Publications & Research :: Policy Research Working Paper The World Region The World Region |