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COUNTRY RISK: Economic Policy, Contagion Effect or Political noise?

Julio Nogués () and Martín Grandes ()
Additional contact information
Julio Nogués: Former Executive Director, The World Bank
Martín Grandes: OCDE Development Centre and D.E.L.T.A, http://www.oecd.org/dev

Authors registered in the RePEc Author Service: Julio Nogues ()

Journal of Applied Economics, 2001, vol. 4, 125-162

Abstract: The opening of the capital account was one of the important structural reforms implemented by Argentina. This liberalization increased the linkage of the real economy with the changing conditions of the international financial markets. In particular, recent data show a clear relation between interest rates and the business cycle on the one hand, and sovereign spreads on the other. In order to understand better these linkages, it is necessary to analyze the determinants of these spreads also known as country risk. Using monthly data for the period 1994 to 1998, we find that this spread is explained by: 1) growth expectations, 2) fiscal deficits, 3) the debt service to export ratio and its growth rate, 4) contagion effects, 5) external shocks including movements of international interest rates, and 6) political noise. Based on these findings, we offer a discussion of some of the policies that should be implemented in order for the spreads to start declining and for the country to eventually reach an "investment grade" rating for its sovereign bonds.

JEL-codes: C22 C50 E43 E44 F30 (search for similar items in EconPapers)
Date: 2001
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