The Determinants of Sovereign Bond Spreads:Theory and Facts from Latin America

MARTIN GRANDES

CUADERNOS DE ECONOMIA

Instituto de Economía - Facultad de Ciencias Económicas y Administrativas - Pontificia Universidad Católica de Chile

Año: 2007 vol. 44 p. 151 - 181

0716-0046

This paper aims to identify the macroeconomic determinants of sovereign bond spreads in Argentina, Brazil and Mexico and discusses the economic policies underlying the divergent fortunes experienced by these countries over 1993-2001. Those determinants, namely real GDP growth, gross capital inflows and debt service burden (as a percentage of GDP), are derived from a consistent theoretical framework and empirically tested. The econometric analysis suggests that a permanent change in these determinants has a more significant and robust impact on spreads than transitory shocks. It also points out that financial contagion or risk-aversion variables have a meaningful role in explaining sovereign spreads across Latin American countries