Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-30T19:48:20.779Z Has data issue: false hasContentIssue false
  • English
  • Français

THE “DARK SIDE” OF CREDIT DEFAULT SWAPS INITIATION: A CLOSE LOOK AT SOVEREIGN DEBT CRISES

Published online by Cambridge University Press:  04 December 2018

Hippolyte Wenéyam Balima ,
Jean-Louis Combes  and
Alexandru Minea
Hippolyte Wenéyam Balima
Affiliation:
International Monetary Fund
Jean-Louis Combes
Affiliation:
University Clermont Auvergne
Alexandru Minea*
Affiliation:
University Clermont Auvergne Carleton University
*
Address correspondence to: Alexandru Minea, Université Clermont Auvergne, CNRS, IRD, CERDI, F-63000 Clermont-Ferrand, France; e-mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine the effect of sovereign credit default swaps (CDS) trading initiation on the occurrence of sovereign debt crises (SDC). Estimations on a large sample of 141 countries for 1980–2013 reveal that, by affecting the fiscal stance, CDS initiation increases by around 1.5 percentage points on average the probability of SDC in countries with CDS compared to the other countries. This result holds for different robustness tests and is found to be stronger for developing countries, for countries with initial lower creditworthiness, and when the degrees of central bank independence and public sector transparency are low. Consequently, compared to existing work emphasizing favorable effects, CDS trading initiation is found to have adverse effects, by increasing the occurrence of SDC. These opposite effects should fuel the literature on measuring the consequences of CDS trading initiation, and its design and implementation from a policy perspective.

Keywords

Credit Default SwapsSovereign Debt CrisesSovereign Bonds
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 1 , January 2021 , pp. 124 - 153
Copyright
© Cambridge University Press 2018

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are particularly grateful to Blake Phillips for sharing his database. We thank Makram El-Shagi and two anonymous referees for valuable comments on a previous version. We are indebted to Xavier Debrun, Jerzy Konieczny, Camelia Turcu, Marcel Voia, and participants at the 3rd HenU/INFER Workshop on Applied Macroeconomics (Kaifeng, China) and the RCEA Macro-Money-Finance Workshop “Advances in Macroeconomics and Finance” (Rimini, Italy) for helpful remarks. We thank the ANR (Agence Nationale de la Recherche) for their financial support through the “Grand Emprunt” and the LABEX IDGM+ (ANR-10-LABX-14-01) mechanism. Usual disclaimers apply.

References

Abadie, A. and Imbens, G. W. (2006) Large sample properties of matching estimators for average treatment effects. Econometrica 74, 235–267.CrossRefGoogle Scholar
Abadie, A. and Imbens, G. W. (2011) Bias corrected matching estimators for average treatment effects. Journal of Business and Economic Statistics 29, 1–11.CrossRefGoogle Scholar
Acharya, V., Drechsler, I. and Schnabl, P. (2014) A pyrrhic victory? Bank bailouts and sovereign credit risk. Journal of Finance 69, 2689–2739.10.1111/jofi.12206CrossRefGoogle Scholar
Acharya, V. V. and Johnson, T. C. (2007) Insider trading in credit derivatives. Journal of Financial Economics 84, 110–141.CrossRefGoogle Scholar
Alesina, A. and Weder, B. (2002) Do corrupt governments receive less foreign aid? American Economic Review 92, 1126–1137.CrossRefGoogle Scholar
Ammer, J. and Cai, F. (2011) Sovereign CDS and bond dynamics in emerging markets: Does the cheapest-to-deliver option matter? Journal of International Financial Markets, Institutions and Money 21, 369–387.CrossRefGoogle Scholar
Arce, O., Mayordomo, S. and Peña, J. Ignacio (2013) Credit-risk valuation in the sovereign CDS and bonds markets: Evidence from the euro area crisis. Journal of International Money and Finance 35, 124–145.CrossRefGoogle Scholar
Ashcraft, A. B. and Santos, J. A. C. (2009) Has the CDS market lowered the cost of corporate debt? Journal of Monetary Economics 56, 514–523.CrossRefGoogle Scholar
Balima, W. H., Combes, J.-L. and Minea, A. (2016) Bond markets initiation and tax revenue mobilization in developing countries. Southern Economic Journal 83, 550–572.CrossRefGoogle Scholar
Balima, W. H., Combes, J.-L. and Minea, A. (2017) Sovereign debt risk in emerging market economies: Does inflation targeting adoption make any difference? Journal of International Money and Finance 70, 360–377.CrossRefGoogle Scholar
Blanco, R., Brennan, S. and Marsh, I. (2005) An empirical analysis of the dynamic relation between investment-grade bonds and credit default swaps. Journal of Finance 60, 2255–2281.CrossRefGoogle Scholar
Bolton, P. and Oehmke, M. (2011) Credit default swaps and the empty creditor problem. Review of Financial Studies 24, 2617–2655.CrossRefGoogle Scholar
Broto, C. and Pérez-Quirós, G. (2015) Disentangling contagion among sovereign CDS spreads during the European debt crisis. Journal of Empirical Finance 32, 165–179.CrossRefGoogle Scholar
Brunner, A. and Krahnen, J. P. (2008) Multiple lenders and corporate distress: Evidence on debt restructuring. Review of Economic Studies 75, 415–442.10.1111/j.1467-937X.2008.00483.xCrossRefGoogle Scholar
Calice, G., Chen, J. and Williams, J. (2013) Liquidity spillovers in sovereign bond and CDS markets: An analysis of the Eurozone sovereign debt crisis. Journal of Economic Behavior & Organization 85, 122–143.CrossRefGoogle Scholar
Che, Y.-K. and Sethi, R. (2014) Credit market speculation and the cost of capital. American Economic Journal: Microeconomics 6, 1–34.Google Scholar
Crowe, C. and Meade, E. (2008) Central bank independence and transparency: Evolution and effectiveness. European Journal of Political Economy 24, 763–777.CrossRefGoogle Scholar
Das, S., Malimipalli, M. and Nayak, S. (2014) Did CDS trading improve the market for corporate bonds? Journal of Financial Economics 11, 495–525.CrossRefGoogle Scholar
Delatte, A.-L., Gex, M. and Lopez-Villavicencio, A. (2012) Has the CDS market influenced the borrowing cost of European countries during the sovereign crisis? Journal of International Money and Finance 31, 481–497.CrossRefGoogle Scholar
Gande, A. and Parsley, D. (2014) Sovereign Credit Ratings, Transparency and International Portfolio Flows. HKIMR Working Paper: No. 12/2014.CrossRefGoogle Scholar
Gilson, S. C., John, K. and Lang, L. H. P. (1990) Troubled debt restructurings: An empirical study of private reorganization of firms in default. Journal of Financial Economics 27, 315–353.CrossRefGoogle Scholar
Hainmueller, J. (2012) Entropy balancing for causal effects: A multivariate reweighting method to produce balanced samples in observational studies. Political Analysis 20, 25–46.CrossRefGoogle Scholar
Hassan, M. K., Ngene, G. M. and Yu, J.-S. (2015) Credit default swaps and sovereign debt markets. Economic Systems 39, 240–252.CrossRefGoogle Scholar
Heckman, J. (1979) Sample selection bias as a specification error. Econometrica 47, 153–161.CrossRefGoogle Scholar
Imbens, G. W. (2004) Nonparametric estimation of average treatment effects under exogeneity: A review. Review of Economics and Statistics 86, 4–29.10.1162/003465304323023651CrossRefGoogle Scholar
Ismailescu, I. and Phillips, B. (2015) Credit default swaps and the market for sovereign debt. Journal of Banking and Finance 52, 43–61.CrossRefGoogle Scholar
Laeven, L. and Valencia, F. (2013) Systemic banking crises database. IMF Economic Review 61, 225–270.CrossRefGoogle Scholar
Li, K. and Prabhala, N. R. (2007) Self-selection models in corporate finance. In Handbook of Corporate Finance: Empirical Corporate Finance I, Chapter 2, pp. 37–86. Amsterdam: Elsevier.Google Scholar
Lin, S. and Ye, H. (2007) Does inflation targeting really make a difference? Evaluating the treatment effect of inflation targeting in seven industrial countries. Journal of Monetary Economics 54, 2521–2533.10.1016/j.jmoneco.2007.06.017CrossRefGoogle Scholar
Massa, M. and Zhang, L. (2012) CDS and the Liquidity Provision in the Bond Market. INSEAD Working Paper: No. 2012/114/FIN.CrossRefGoogle Scholar
Minea, A. and Tapsoba, R. (2014) Does inflation targeting improve fiscal discipline? Journal of International Money and Finance 40, 185–203.CrossRefGoogle Scholar
Neuenkirch, M. and Neumeier, F. (2016) The impact of US sanctions on poverty. Journal of Development Economics 121, 110–119.CrossRefGoogle Scholar
Parlour, C. and Winton, A. (2013) Laying off credit risk: Loan sales versus credit default swaps. Journal of Financial Economics 107, 25–45.CrossRefGoogle Scholar
Peristiani, S. and Savino, V. (2011) Are credit default swaps associated with higher corporate defaults? FRBNY Staff Report 494.CrossRefGoogle Scholar
Qian, Z., Wang, W. and Ji, K. (2017) Sovereign credit risk, macroeconomic dynamics, and financial contagion: Evidence from Japan. Macroeconomic Dynamics 21, 2096–2120.CrossRefGoogle Scholar
Roberts, M. R. and Whited, T. M. (2012) Endogeneity in empirical corporate finance. In: Handbook of the Economics of Finance 2, Chapter 7, pp. 493–572. Amsterdam: Elsevier.Google Scholar
Saretto, A. and Tookes, H. E. (2013) Corporate leverage, debt maturity, and credit supply: The role of credit default swaps. Review of Financial Studies 26, 1190–1247.10.1093/rfs/hht007CrossRefGoogle Scholar
Shim, I. and Zhu, H. (2014) The impact of CDS trading on the bond market: Evidence from Asia. Journal of Banking and Finance 40, 460–475.CrossRefGoogle Scholar
Staiger, D. and Stock, J. H. (1997) Instrumental variables regression with weak instruments. Econometrica 65, 557–586.CrossRefGoogle Scholar
Stein, J. (1987) Informational externalities and welfare-reducing speculation. Journal of Political Economy 95, 1123–1145.CrossRefGoogle Scholar
Stulz, R. M. (2010) Credit default swaps and the credit crisis. Journal of Economic Perspectives 24, 73–92.CrossRefGoogle Scholar
Subrahmanyam, M., Tang, D. and Wang, S. (2014) Does the tail wag the dog? The effect of credit default swaps on credit risk. Review of Financial Studies 27, 2926–2960.CrossRefGoogle Scholar
Supplementary material: File

Balima et al. supplementary material

Balima et al. supplementary material 1

Download Balima et al. supplementary material(File)
File 429.6 KB