The Sovereign Default Risk of Giant Oil Discoveries

Carlos Esquivel

Departmental Working Papers from Rutgers University, Department of Economics

Abstract: I study the impact of giant oil field discoveries on default risk. I document that interest rate spreads of emerging economies increase by 1.3 percentage points following a discovery of median size. I develop a sovereign default model with investment, three-sector production, and oil discoveries. Following a discovery, borrowing and investment increase. Capital reallocates from manufacturing toward oil and non-traded sectors, increasing the volatility of tradable income. Borrowing increases default risk and higher volatility increases the risk premium, both of which increase spreads. Discoveries generate welfare gains of 0.44 percent. Insurance against low oil prices increases these gains to 0.60. Select number of author(s): : 1

Keywords: Soveriegn default; Oil Discoveries (search for similar items in EconPapers)
JEL-codes: F34 F41 Q33 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2024-11-12
New Economics Papers: this item is included in nep-dge, nep-ene, nep-fdg, nep-opm and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:rut:rutres:202404

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