News, sovereign debt maturity, and default risk Articles uri icon

publication date

  • September 2020

start page

  • 1

end page

  • 23

volume

  • 126

International Standard Serial Number (ISSN)

  • 0022-1996

Electronic International Standard Serial Number (EISSN)

  • 1873-0353

abstract

  • Leading into a debt crisis, interest rate spreads on sovereign debt rise before the economy experiences a decline in productivity, suggesting that news about future economic developments may play an important role in these episodes. An empirical VAR estimation shows that a news shock has a larger contemporaneous impact on sovereign credit spreads than a comparable shock to labor productivity. A quantitative model of news and sovereign debt default with endogenous maturity choice generates impulse responses and a variance decomposition similar to the empirical VAR estimates. The dynamics of the economy after a bad news shock share some features of a productivity shock and some features of sudden stop events. However, unlike during sudden stop episodes, long-term debt does not shield the country from bad news shocks, and it may even exacerbate default risk. Finally, an increase in the precision of news allows the government to improve its debt maturity management, especially during periods of high stress in credit markets, and thus face lower yield spreads while increasing the amount of debt.

keywords

  • country risk; crises; default; maturity; news; sovereign debt; spreads