Forgiven but not Forgotten: Emerging Market Credit Spreads Following Debt Relief

Mikkel Vittrup Hauerberg; David Lando; Aleksander Koldborg Tetzlaff

Forgiven but not Forgotten: Emerging Market Credit Spreads Following Debt Relief

Mikkel Vittrup Hauerberg, David Lando, Aleksander Koldborg Tetzlaff

Department of Finance

Research output: Contribution to conference › Paper › Research › peer-review

Abstract

This paper examines the effects of large-scale debt reliefs aimed at Highly Indebted Poor Countries (HIPC) on the yield spreads of subsequent government debt issues. Due to scarce availability of existing measures, we originate raw data on 3,498 individual fixed-income securities to construct country-specific yield spreads. Our evidence suggests that HIPC governments pay an average yield spread premium of 298 bps on USD-denominated bonds and 128-333 bps on local-currency bonds compared to similar countries, which have not received debt relief. We estimate that the extra credit spread amounts to USD 24bn or roughly 19 pct of their relief. The premium cannot be explained by other common measures of sovereign default risk. We discuss indicators of moral hazard.

Original language	English
Publication date	2020
Number of pages	71
Publication status	Published - 2020
Event	The 47th European Finance Association Annual Meeting. EFA 2020 - Virtual from The Aalto University School of Business, Helsinki, Finland Duration: 20 Aug 2020 → 21 Aug 2020 Conference number: 47 https://efa2020.efa-meetings.org/

Conference

Conference	The 47th European Finance Association Annual Meeting. EFA 2020
Number	47
Location	Virtual from The Aalto University School of Business
Country/Territory	Finland
City	Helsinki
Period	20/08/2020 → 21/08/2020
Internet address	https://efa2020.efa-meetings.org/

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Hauerberg, M. V., Lando, D., & Tetzlaff, A. K. (2020). Forgiven but not Forgotten: Emerging Market Credit Spreads Following Debt Relief. Paper presented at The 47th European Finance Association Annual Meeting. EFA 2020, Helsinki, Finland. https://www.conftool.com/efa2020/index.php/1908-APE-EFA2020-Forgiven_but_not_forgotten.pdf?page=downloadPaper&filename=1908-APE-EFA2020-Forgiven_but_not_forgotten.pdf&form_id=1908&form_version=final

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abstract = "This paper examines the effects of large-scale debt reliefs aimed at Highly Indebted Poor Countries (HIPC) on the yield spreads of subsequent government debt issues. Due to scarce availability of existing measures, we originate raw data on 3,498 individual fixed-income securities to construct country-specific yield spreads. Our evidence suggests that HIPC governments pay an average yield spread premium of 298 bps on USD-denominated bonds and 128-333 bps on local-currency bonds compared to similar countries, which have not received debt relief. We estimate that the extra credit spread amounts to USD 24bn or roughly 19 pct of their relief. The premium cannot be explained by other common measures of sovereign default risk. We discuss indicators of moral hazard.",

author = "Hauerberg, {Mikkel Vittrup} and David Lando and Tetzlaff, {Aleksander Koldborg}",

year = "2020",

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Hauerberg, MV, Lando, D & Tetzlaff, AK 2020, 'Forgiven but not Forgotten: Emerging Market Credit Spreads Following Debt Relief', Paper presented at The 47th European Finance Association Annual Meeting. EFA 2020, Helsinki, Finland, 20/08/2020 - 21/08/2020. <https://www.conftool.com/efa2020/index.php/1908-APE-EFA2020-Forgiven_but_not_forgotten.pdf?page=downloadPaper&filename=1908-APE-EFA2020-Forgiven_but_not_forgotten.pdf&form_id=1908&form_version=final>

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AU - Lando, David

AU - Tetzlaff, Aleksander Koldborg

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N2 - This paper examines the effects of large-scale debt reliefs aimed at Highly Indebted Poor Countries (HIPC) on the yield spreads of subsequent government debt issues. Due to scarce availability of existing measures, we originate raw data on 3,498 individual fixed-income securities to construct country-specific yield spreads. Our evidence suggests that HIPC governments pay an average yield spread premium of 298 bps on USD-denominated bonds and 128-333 bps on local-currency bonds compared to similar countries, which have not received debt relief. We estimate that the extra credit spread amounts to USD 24bn or roughly 19 pct of their relief. The premium cannot be explained by other common measures of sovereign default risk. We discuss indicators of moral hazard.

AB - This paper examines the effects of large-scale debt reliefs aimed at Highly Indebted Poor Countries (HIPC) on the yield spreads of subsequent government debt issues. Due to scarce availability of existing measures, we originate raw data on 3,498 individual fixed-income securities to construct country-specific yield spreads. Our evidence suggests that HIPC governments pay an average yield spread premium of 298 bps on USD-denominated bonds and 128-333 bps on local-currency bonds compared to similar countries, which have not received debt relief. We estimate that the extra credit spread amounts to USD 24bn or roughly 19 pct of their relief. The premium cannot be explained by other common measures of sovereign default risk. We discuss indicators of moral hazard.

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