Publication:
Sovereign Debt Distress and Corporate Spillover Impacts

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dc.contributor.authorDailami, Mansoor
dc.date.accessioned2012-03-19T18:41:10Z
dc.date.available2012-03-19T18:41:10Z
dc.date.issued2010-07-01
dc.description.abstractIn 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.en
dc.identifierhttp://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100726102657
dc.identifier.doi10.1596/1813-9450-5380
dc.identifier.urihttps://hdl.handle.net/10986/3864
dc.languageEnglish
dc.relation.ispartofseriesPolicy Research working paper ; no. WPS 5380
dc.rightsCC BY 3.0 IGO
dc.rights.holderWorld Bank
dc.rights.urihttp://creativecommons.org/licenses/by/3.0/igo/
dc.subjectACTIVE MARKET
dc.subjectASSET CLASS
dc.subjectBALANCE OF PAYMENTS
dc.subjectBALANCE OF PAYMENTS CRISIS
dc.subjectBALANCE SHEETS
dc.subjectBANK BALANCE SHEET
dc.subjectBANK CREDIT
dc.subjectBANK LOAN
dc.subjectBANK LOANS
dc.subjectBANKING MARKET
dc.subjectBANKING SYSTEM
dc.subjectBASIS POINTS
dc.subjectBOND HOLDERS
dc.subjectBOND INSTRUMENTS
dc.subjectBOND ISSUANCE
dc.subjectBOND ISSUERS
dc.subjectBOND MARKET
dc.subjectBOND PRICE
dc.subjectBOND PRICES
dc.subjectBOND RATING
dc.subjectBOND SPREAD
dc.subjectBOND SPREADS
dc.subjectBOND VALUATION
dc.subjectBOND YIELD
dc.subjectBONDHOLDERS
dc.subjectBONDS
dc.subjectBORROWER
dc.subjectBUSINESS CYCLE
dc.subjectBUYBACK
dc.subjectBUYBACKS
dc.subjectCAPITAL FLOWS
dc.subjectCAPITAL MARKET
dc.subjectCAPITAL MARKET DEVELOPMENT
dc.subjectCASH FLOW
dc.subjectCASH FLOWS
dc.subjectCDS
dc.subjectCOLLATERALIZATION
dc.subjectCOLLECTIVE ACTIONS
dc.subjectCOLLECTIVE ACTIONS CLAUSES
dc.subjectCOMMODITY PRICES
dc.subjectCORPORATE BOND
dc.subjectCORPORATE BOND ISSUANCE
dc.subjectCORPORATE BOND ISSUANCES
dc.subjectCORPORATE BOND MARKET
dc.subjectCORPORATE BONDS
dc.subjectCORPORATE BORROWERS
dc.subjectCORPORATE CREDIT RISK
dc.subjectCORPORATE DEBT
dc.subjectCORPORATE DEFAULT
dc.subjectCORPORATE GOVERNANCE
dc.subjectCORPORATE MARKET
dc.subjectCORPORATE SECURITIES
dc.subjectCOUNTRY CREDIT
dc.subjectCOUNTRY RISK
dc.subjectCOUPON
dc.subjectCREDIT AGENCIES
dc.subjectCREDIT DEFAULT
dc.subjectCREDIT DEFAULT SWAP
dc.subjectCREDIT DERIVATIVES
dc.subjectCREDIT RATINGS
dc.subjectCREDIT RISK
dc.subjectCREDIT RISK ASSESSMENT
dc.subjectCREDIT RISKS
dc.subjectCREDIT SPREADS
dc.subjectCREDITORS
dc.subjectCREDITWORTHINESS
dc.subjectCURRENCY
dc.subjectCURRENCY CRISES
dc.subjectDEBT CAPITAL
dc.subjectDEBT CONTRACT
dc.subjectDEBT CRISIS
dc.subjectDEBT ISSUANCE
dc.subjectDEBT ISSUERS
dc.subjectDEBT MANAGEMENT
dc.subjectDEBT OBLIGATION
dc.subjectDEBT OBLIGATIONS
dc.subjectDEBT OUTSTANDING
dc.subjectDEBT RESTRUCTURING
dc.subjectDEBT SERVICING
dc.subjectDEBTOR
dc.subjectDEBTOR COUNTRIES
dc.subjectDEFAULT INFORMATION
dc.subjectDEFAULT PROBABILITY
dc.subjectDEFAULT RISK
dc.subjectDEFAULTS
dc.subjectDEVALUATION
dc.subjectDEVELOPING COUNTRIES
dc.subjectDISPUTE RESOLUTION
dc.subjectDOMESTIC BANKS
dc.subjectDUMMY VARIABLE
dc.subjectECONOMIC DEVELOPMENT
dc.subjectEMERGING BOND MARKET
dc.subjectEMERGING ECONOMIES
dc.subjectEMERGING MARKET
dc.subjectEMERGING MARKET BOND
dc.subjectEMERGING MARKET ECONOMIES
dc.subjectEMERGING MARKETS
dc.subjectEQUITY MARKETS
dc.subjectEQUITY PRODUCTS
dc.subjectEUROBOND
dc.subjectEXTERNAL BORROWING
dc.subjectEXTERNAL DEBT
dc.subjectFACE VALUE
dc.subjectFINANCIAL CRISES
dc.subjectFINANCIAL CRISIS
dc.subjectFINANCIAL DEVELOPMENT
dc.subjectFINANCIAL DISTRESS
dc.subjectFINANCIAL HEALTH
dc.subjectFINANCIAL INSTITUTIONS
dc.subjectFINANCIAL MARKET
dc.subjectFINANCIAL MARKETS
dc.subjectFINANCIAL STRESS
dc.subjectFISCAL POLICY
dc.subjectFIXED EXCHANGE RATE
dc.subjectFLOATING RATE
dc.subjectFLOATING RATE NOTES
dc.subjectFOREIGN BANK
dc.subjectFOREIGN CAPITAL
dc.subjectFOREIGN CURRENCY
dc.subjectFOREIGN CURRENCY DEBT
dc.subjectFOREIGN CURRENCY LOAN
dc.subjectFOREIGN DEBT
dc.subjectFOREIGN INVESTORS
dc.subjectFOREIGN­CURRENCY
dc.subjectFREE ASSET
dc.subjectGLOBAL BOND
dc.subjectGLOBAL BOND MARKETS
dc.subjectGLOBAL BUSINESS
dc.subjectGLOBAL CAPITAL
dc.subjectGLOBAL CAPITAL MARKETS
dc.subjectGLOBAL MARKETS
dc.subjectGOVERNMENT DEBT
dc.subjectGOVERNMENT GUARANTEES
dc.subjectGOVERNMENT SECURITIES
dc.subjectGOVERNMENT SUPPORT
dc.subjectHIGH-YIELD BOND
dc.subjectINFLATION
dc.subjectINSTITUTIONAL DEVELOPMENT
dc.subjectINTEREST RATE
dc.subjectINTERNATIONAL BANK
dc.subjectINTERNATIONAL BANKING
dc.subjectINTERNATIONAL BOND
dc.subjectINTERNATIONAL BOND MARKETS
dc.subjectINTERNATIONAL CAPITAL
dc.subjectINTERNATIONAL CAPITAL MARKETS
dc.subjectINTERNATIONAL DEBT
dc.subjectINTERNATIONAL DEBT MARKETS
dc.subjectINTERNATIONAL INTEREST
dc.subjectINTERNATIONAL MARKETS
dc.subjectINVESTOR CONFIDENCE
dc.subjectISSUANCE
dc.subjectISSUANCES
dc.subjectLIABILITY
dc.subjectLIABILITY MANAGEMENT
dc.subjectLIQUIDATION
dc.subjectLIQUIDITY
dc.subjectLOAN
dc.subjectLOAN DATA
dc.subjectLOAN MARKET
dc.subjectLOAN MARKETS
dc.subjectLOCAL CURRENCIES
dc.subjectLOCAL FINANCE
dc.subjectLONG-TERM INVESTMENT
dc.subjectMACROECONOMIC CONDITIONS
dc.subjectMACROECONOMIC RISKS
dc.subjectMACROECONOMIC VARIABLES
dc.subjectMARKET BORROWERS
dc.subjectMARKET BORROWINGS
dc.subjectMARKET CONDITIONS
dc.subjectMARKET CONSTRAINTS
dc.subjectMARKET DEBT
dc.subjectMARKET DEVELOPMENT
dc.subjectMARKET FINANCE
dc.subjectMARKET PRACTICE
dc.subjectMARKET PRICE
dc.subjectMARKETABLE BOND
dc.subjectMATURITY
dc.subjectMONETARY POLICY
dc.subjectPAYMENT OBLIGATION
dc.subjectPOLITICAL RISK
dc.subjectPRIVATE BOND
dc.subjectPRIVATE BORROWERS
dc.subjectPRIVATE BORROWING
dc.subjectPRIVATE CORPORATE DEBT
dc.subjectPRIVATE CREDIT
dc.subjectPRIVATE DEBT
dc.subjectPUBLIC DEBT
dc.subjectPUBLIC FINANCES
dc.subjectRETURN
dc.subjectRISK AVERSION
dc.subjectRISK EXPOSURE
dc.subjectRISK FACTORS
dc.subjectRISK PREMIUMS
dc.subjectRISKY ASSET
dc.subjectSAFETY NET
dc.subjectSECONDARY MARKET
dc.subjectSMALL BUSINESSES
dc.subjectSOVEREIGN BOND
dc.subjectSOVEREIGN BOND MARKET
dc.subjectSOVEREIGN BOND MARKETS
dc.subjectSOVEREIGN BONDS
dc.subjectSOVEREIGN DEBT
dc.subjectSOVEREIGN DEBT PROBLEMS
dc.subjectSOVEREIGN DEFAULT
dc.subjectSOVEREIGN DEFAULTS
dc.subjectSOVEREIGN ENTITY
dc.subjectSOVEREIGN ISSUERS
dc.subjectSOVEREIGN RISK
dc.subjectSWAP
dc.subjectSWAPS
dc.subjectT-BOND
dc.subjectTERM STRUCTURE OF INTEREST RATES
dc.subjectTRANSPARENCY
dc.subjectTREASURY
dc.subjectTREASURY BOND
dc.subjectTREASURY BOND YIELD
dc.subjectTREASURY SECURITIES
dc.subjectTREASURY SECURITY
dc.subjectVALUATION
dc.subjectVALUE OF ASSETS
dc.subjectWARRANTS
dc.subjectYIELD SPREADS
dc.titleSovereign Debt Distress and Corporate Spillover Impactsen
dspace.entity.typePublication
okr.crossref.titleSovereign Debt Distress And Corporate Spillover Impacts
okr.date.disclosure2010-07-26
okr.date.doiregistration2025-04-10T11:44:33.738983Z
okr.doctypePublications & Research::Policy Research Working Paper
okr.docurlhttp://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100726102657
okr.guid293811468163463532
okr.identifier.doi10.1596/1813-9450-5380
okr.identifier.externaldocumentum000158349_20100726102657
okr.identifier.internaldocumentum12583782
okr.identifier.reportWPS5380
okr.language.supporteden
okr.pdfurlhttp://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2010/07/26/000158349_20100726102657/Rendered/PDF/WPS5380.pdfen
okr.region.administrativeThe World Region
okr.region.administrativeThe World Region
okr.unitDevelopment Research Group (DECRG)
okr.volume1 of 1
relation.isSeriesOfPublication26e071dc-b0bf-409c-b982-df2970295c87
relation.isSeriesOfPublication.latestForDiscovery26e071dc-b0bf-409c-b982-df2970295c87
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