Sovereign Default, Interest Rates and Political Uncertainty in Emerging Markets

Gabriel Cuadra () and Horacio Sapriza

No 2006-02, Working Papers from Banco de México

Abstract: Emerging economies tend to experience larger political uncertainty and more default episodes than developed countries. This paper studies the effect of political uncertainty on sovereign default and interest rate spreads in emerging markets. The paper develops a quantitative model of sovereign debt and default under political uncertainty in a small open economy. Consistent with empirical evidence, the quantitative analysis shows that higher levels of political uncertainty significantly raise the default frequency and both the level and volatility of the spreads. When parties borrow from international credit markets, the presence of political uncertainty induces a short-sight behavior in politicians.

Keywords: Default; Sovereign Debt; Political Risk (search for similar items in EconPapers)
JEL-codes: F34 F41 (search for similar items in EconPapers)
Date: 2006-02
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Related works:
Journal Article: Sovereign default, interest rates and political uncertainty in emerging markets (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:bdm:wpaper:2006-02

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