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Sovereign default risk, debt uncertainty and fiscal credibility: The case of Brazil

Gabriel Montes and Ivan Souza

The North American Journal of Economics and Finance, 2020, vol. 51, issue C

Abstract: Since Credit Default Swaps spreads reflect the sovereign risk and, thus, the uncertainties related to government solvency, the goal of this study is to examine the relation between sovereign risk and debt uncertainty (measured by the disagreement in expectations about public debt) in an important developing country – Brazil. Furthermore, the paper analyzes whether fiscal credibility plays a key role in mitigating the effect of debt uncertainty on sovereign risk. The results suggest the disagreement in expectations about public debt affects the sovereign risk, and fiscal credibility plays a twofold role, it reduces sovereign risk, and it mitigates the effect of debt uncertainty on sovereign risk. Besides, quantile regression estimates reveal that fiscal credibility improvements are even more important when sovereign risk levels are higher.

Keywords: Sovereign risk; CDS; Disagreement; Expectation; Public debt; Credibility (search for similar items in EconPapers)
JEL-codes: E62 G15 H63 H68 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:51:y:2020:i:c:s1062940818302316

DOI: 10.1016/j.najef.2018.09.009

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