Default and the maturity structure in sovereign bonds

Cristina Arellano and Ananth Ramanarayanan ()

No 19, Globalization and Monetary Policy Institute Working Paper from Federal Reserve Bank of Dallas

Abstract: This paper studies the maturity composition and the term structure of interest rate spreads of government debt in emerging markets. We document that in Argentina, Brazil, Mexico, and Russia, when interest rate spreads rise, debt maturity shortens and the spread on short-term bonds is higher than on long-term bonds. To account for this pattern, we build a dynamic model of international borrowing with endogenous default and multiple maturities of debt. Short-term debt can deliver higher immediate consumption than long-term debt; large long-term loans are not available because the borrower cannot commit to save in the near future towards repayment in the far future. However, issuing long-term debt can insure against the need to roll-over short-term debt at high interest rate spreads. The trade-off between these two benefits is quantitatively important for understanding the maturity composition in emerging markets. When calibrated to data from Brazil, the model matches the dynamics in the maturity of debt issuances and its comovement with the level of spreads across maturities.

Keywords: Bonds; Debt; Default (Finance); Emerging markets; International finance (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-fmk
Date: 2008
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Working Paper: Default and the maturity structure in sovereign bonds (2008)
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