Why Do Emerging Economies Borrow Short Term?

Fernando Broner, Guido Lorenzoni and Sergio Schmukler ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We argue that emerging economies borrow short term due to the high risk premium charged by bondholders on long-term debt. First, we present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a rollover crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a trade-off between safer long-term debt and cheaper short-term debt. Second, we construct a new database of sovereign bond prices and issuance. We show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting towards shorter maturities. The evidence suggests that international investors’ time-varying risk aversion is crucial to understand the debt structure in emerging economies.

Keywords: emerging market debt; financial crises; investor risk aversion; maturity structure; moral hazard; sovereign spreads; risk premium; term premium (search for similar items in EconPapers)
JEL-codes: E43 F30 F32 F34 F36 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-mac
Date: 2003-08, Revised 2007-03
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Related works:
Working Paper: Why do emerging economies borrow short term? (2004)
Working Paper: Why Do Emerging Economies Borrow Short Term? (2007)
Working Paper: Why Do Emerging Economies Borrow Short Term? (2007)
Working Paper: Why Do Emerging Economies Borrow Short Term? (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:upf:upfgen:838

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