Sovereign debt distress in the developed and emerging countries

Abstract

Global financial markets have experienced one of the biggest economic crises since the Great Depression in the 1930s. The negative effect of the economic crisis is felt by all the major economies of the world, especially by the countries with structural fiscal problems. Since financial debt or public debt is crucial for economic growth and development, many major governments have borrowed heavily. Over the last two decades, emerging economies had similar experiences and faced sovereign debt crises as a result of heavy debt burdens. The aim of the study is to investigate the stages of a sovereign debt crisis and determine the major indicators of a debt crisis for major developed and emerging countries over the period of 1993-2011. Ordinary Least Squares (OLS) Method is employed to determine the sources of debt crisis and compare the performances of countries, with quarterly panel data. The striking feature of the analysis is that major indicators of sovereign debt default have a strong effect in both models for the developed countries and the European countries with default risk. Empirical results indicate that current account balance- to-GDP is important in terms of sovereign debt default for all countries. Total external debt-to-GDP is found to be a very important determinant for sovereign debt default in the developed countries. Interest rates are implied to be an important determinant in advanced countries but it is not that important in emerging markets. Foreign exchange reserves are also important for emerging market countries and more important for European countries with default risk.