Review Journal "Sovereign Debt Distress and Corporate Spillover Impacts"

Title	Sovereign Debt Distress and Corporate Spillover Impacts
Author	Mansoor Dailami
year	2010

Introduction

When rising sovereign credit risk in highly indebted developed economies represents a major source of policy concern and market anxiety, drawing attention to the corporate debt problems that may loom ahead is not only a call for a more systematic approach to debt management, but an opportunity to highlight the hidden dynamics between sovereign and corporate debt. The rest of the paper proceeds as follows: section two highlights the growing importance of corporate debt in the external financial profile of emerging market economies and provides estimates of corporate debt refinancing coming due in the next few years.

The Growing Importance of Emerging-Market Corporate Debt

Sovereign demand for external financing declined in the majority of developing countries in years leading to the crisis of 2008-09, market attention shifted to the corporate sector—both public and private-- as offering a new generation of EM credit and equity products. In many respects, the market for emerging-market credit has shifted toward the corporate sector (encompassing both private and public entities), with implications for access to finance, debt sustainability, and long-term investment and growth. Over the decade leading up to the 2008–09 crisis.

III. Determinants of Emerging-Market Corporate Debt Spreads in the Presence of Sovereign Risk

Standard corporate bond valuation models of structural and reduced-form types dominating the literature in corporate finance in advanced countries. The fact that most emerging-market firms tapping international debt markets are large and relatively highly leveraged raises the possibility that corporate debt distress could also spill over to the sovereign side, as corporations in distress (both financial and non-financial) may require government support either directly or indirectly through governments involvement in the process of corporate debt restructuring and workouts.

Conclusion and Policy Implications

In the corporate world, the ability of a borrower to access international capital marketsand the terms according to which it can raise capital depend not only on its own creditworthiness, but also on the investors’ views and risk perceptions of the country in which the borrower is domiciled. We develop an analytical framework for thinking about the correlation between sovereign and corporate credit risk and provide tentative evidence on the size of additional capital costs that private borrowers bear in times of sovereign debt distress. One important source could be the fact that both the firm and its home-government operate in the same domestic macroeconomic and global environment, and thus periods of economic downturns that heighten the firm’s probability of default worsen also the government’s fiscal situation and hence its capacity to service its debt