Missing Link

A striking feature of sovereign lending is that many countries with moderate debt-to-income ratios systematically face higher spreads and more stringent borrowing constraints than others with far higher debt ratios. Earlier research has rationalized the phenomenon in terms of sovereign reputation and countries'' distinct credit histories. This paper provides theoretical and empirical evidence to show that differences in underlying macroeconomic volatility are key. While volatility increases the need for international borrowing to help smooth domestic consumption, the ability to borrow is constrained by the higher default risk that volatility engenders.Sovereign debt;Emerging markets;External debt;probability, statistics, debt intolerance, probabilities, equation, repayments, sovereign borrower, statistical significance, serial defaulters, debt ratios, heteroscedasticity, debt threshold, international borrowing, debt servicing, debt statistics, debt service, forecasting, optimization, debt crisis, sovereign defaults, debt service to export, standard deviation, standard deviations, ratio of debt, debt contract, calibrations, debt burden, debt burdens, outlier, international debt, debt crises, external borrowing, correlation, statistic, external obligations, debt accumulation, dummy variable, ratio of debt service to exports, central bank, logit analysis, maximum likelihood method, linear time, linear time trend, debt servicing capacity, market debt, descriptive statistics, survey, probability distribution, outliers, debt maturity, maximum likelihood methods, debt ratio, econometrics, prediction, normal distribution, debt problem, multilateral debt, debt service to exports, financial statistics, private sector debt, international lending, ratios of debt, parsimonious model, estimation technique, public debts