Default risk and optimal debt management

Drudi, Francesco; Giordano, Raffaela

doi:10.1016/s0378-4266(99)00110-7

Cited by 100 publications

(27 citation statements)

References 11 publications

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“…According to our median point estimates, an improvement in the fiscal balance-to-GDP ratio by 1% point is associated with a decline in the share of foreign currency debt and in the share of short-term debt in total public domestic debt by about 0.25% point each; when all sources of risky domestic debt are combined together, the total decline is in the order of 0.4% point. As aforementioned, fiscal profligacy might prompt governments to make their commitment to price stability more credible by issuing debt with shorter maturities (as in Missale and Blanchard, 1994) or prevent them from issuing long-term debt as the debt premium becomes overly large (as in Drudi and Giordano, 2000). The relationship is causal in most specifications, except when the measure that combines all risks together is the dependent variable.…”

Section: Core Resultsmentioning

confidence: 99%

“…Missale and Blanchard (1994) show that governments will tend to have a shorter debt maturity to enhance credibility when the debt burden is high, but not necessarily at low levels. 10 In a similar vein, Drudi and Giordano (2000) develop a model where the relation between the level and the maturity of debt depends on both inflation and default risk. The relation is negative at high levels of debt in particular, because the default risk premium becomes then too large for governments to issue long-term debt.…”

Section: Soundness Of Public Financesmentioning

confidence: 99%

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Risky public domestic debt composition in emerging economies

Mehl

Reynaud

2010

Journal of International Money and Finance

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Section: Core Resultsmentioning

confidence: 99%

Section: Soundness Of Public Financesmentioning

confidence: 99%

Risky public domestic debt composition in emerging economies

Mehl

Reynaud

2010

Journal of International Money and Finance

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“…Additionally, we studied the existence of a non-monotonic relationship between maturity structure, sovereign bond yields and risk premiums (Diamond 1991) by distinguishing two subgroups of countries (peripheral and core countries). Finally, this study differentiates between highly and less indebted countries to analyze the relationship between the maturity structure and sovereign bond yields and sovereign risk, following the approaches of Alesina et al (1992) and Drudi and Giordano (2000).…”

Section: Introductionmentioning

confidence: 99%

“…They also obtained evidence that this trend intensifies in times of crisis, since in this case, the risk premium that investors incorporate into long-term bonds is higher than that in times of financial stability. Drudi and Giordano (2000) deepened the analysis of the optimal maturity structure and found that lengthening the maturity structure decreased the risk of default whereas shortening the maturity structure increased default risk, therefore requiring that the optimal maturity structure be lengthened. However, they also stated that, for highly indebted countries, it is likely that the risk premium in long-term instruments is so high that issuing short-term debt is the only viable option.…”

Section: Introductionmentioning

confidence: 99%

Bond Yields, Sovereign Risk and Maturity Structure

González-Fernández¹,

González-Velasco²

2018

Risks

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The aim of this paper is to analyze the relation between maturity structure, sovereign bond yields and sovereign risk in the Economic and Monetary Union for the period of 1990-2013. The results confirm the existence of an inverse relationship between sovereign bond yields, sovereign risk and the maturity structure of sovereign debt, regardless of the proxy that is used to measure sovereign risk and the time variance of the variables employed. The results indicate that risk shortens the maturity structure of sovereign debt because it reduces the stock of long-term debt. The relationship between maturity structure and sovereign bond yields differs depending on the risk of the countries analyzed (non-monotonic relationship) and the differences between peripheral and core countries are greater for higher levels of the yields. If we control for the indebtedness level of these countries, the results show that the relationship between the sovereign bond yields and maturity strengthens as the debt level increases.Risks 2018, 6, 109 2 of 25 maturity structure and credit risk has been analyzed in depth in the field of corporate finance, for instance in the works of Myers (1977), Flannery (1986 and Diamond (1991) and, more recently, in those of Baker et al. (2003) and Brunnermeier and Oehmke (2013), among others. However, there are fewer studies in the field of public finance in which the relationship between maturity and sovereign risk is analyzed, as public finance studies have paid more attention to other research topics, such as debt levels and risk premiums. Moreover, maturity structure is a fundamental tool in managing sovereign debt (Goudswaard 1990). Therefore, this paper attempts to extend the existing literature on this line of research, which is particularly interesting in the context of the current financial crisis.The results showed that sovereign bond yields, sovereign risk and the maturity structure of sovereign debt are inversely related. This finding indicates that an increase in the risk level shortens the maturity structure for the sample. Furthermore, the analysis of the debt maturity structure suggests it is reduced when the sovereign risk increases as the proportion of long-term debt reduces. Another interesting result was the existence of a non-monotonic relationship between sovereign bond yields and the maturity structure debt. We found evidence that in high risk countries (i.e., peripheral countries), the maturity structure of the debt shortens because of the increase in sovereign bond yields. However, in countries with lower risk (i.e., core countries 1 ), this inverse relationship is not as clear. If sovereign bond yields increase, the yields of long-term bonds from countries with higher sovereign risk (i.e., peripheral countries) increase to a greater extent than those of short-term bonds, i.e., the increase in the sovereign bond yields increases the term premium. Therefore, these countries resort to issuing short-term debt to reduce their funding costs. However, the yields of long-term governmen...

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“…Previous empirical studies on financial crisis before 2010 show that increases in sovereign default risk may reduce foreign credit to the domestic private sectors via a decline in credit supply (see, e.g., Drudi and Giordano 2000;Dooley and Verma 2001;and Tomz and Wright 2008). The increased sovereign default risk also causes a decrease in the aggregate demand of credit.…”

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confidence: 99%

An anatomy of credit risk transfer between sovereign and financials in the Eurozone crisis

Banerjee

Hung

2016

Journal of International Financial Markets, Institutions and Mo

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Use policyThe full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. AbstractIn this paper we assess the effectiveness of large scale bailouts aiming at preventing a financial crisis from further propagating into a systemic risk. We examine the structural changes in the relationship between the sovereign and financial institutions' credit default swap spreads during the European sovereign debt crisis. Before the first Greek bailout by the EFSF, the sovereign and financial sectors exhibit a two-way feedback effect for both the short and the long runs. Crucially, we find that after the first Greek bailout, shocks in the financial sector either exert significantly negative impacts or lose influences on the sovereign sector. In contrast, all the later bailouts by the EFSF (the second Greek bailout, Irish and Portugal bailouts) do not show this pattern change in the two-way risk transfer relationship.

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Default risk and optimal debt management

Cited by 100 publications

References 11 publications

Risky public domestic debt composition in emerging economies

Risky public domestic debt composition in emerging economies

Bond Yields, Sovereign Risk and Maturity Structure

An anatomy of credit risk transfer between sovereign and financials in the Eurozone crisis

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