Asian-Pacific markets have been enjoying an extremely favorable economic climate generated by high global liquidity over the past three years. In 2006, for example, the excess of liquidity and the overall positive economic performance of these countries led to the lowest sovereign spreads in history falling below 200 basis points, as shown in Exhibit 1.
Among the mechanisms contributing to this process are: 1) the low interest rates in mature markets (the U.S., the U.K., Europe, and Japan), until recently declining due to the burst of the dotcom bubble in 2000; 2) the steep yield curve, providing incentives for carrying leveraged positions; and 3) the low long- term interest rates in the U.S. relative to the country’s economic growth rate.
The overall liquidity, together with the reduction on risk perception that it creates, have encouraged global institutional investors to take strategic positions in Asian-Pacific markets, thus narrowing the spreads even more. Furthermore, the average credit classification provided by international rating agencies for the countries composing the EMBI+ has gone up to the highest level ever (Ba1/BB+ as of September 2006), expanding the base of investors even more. This scenario has allowed Asian-Pacific economies to finance their debt via local currency issues in the domestic and foreign markets, thus allowing them to improve the composition of their public debt by extending its maturity profile, reducing the proportion denominated in foreign currency and accumulating reserves.
Nevertheless, the crucial issue for Asian-Pacific markets is whether the current level of sovereign spreads is sustainable in the face a potential reversal of cyclical factors, such as those involving liquidity, ch...
... middle of paper ...
... the dependent variable (interest rate), a common approach for determining sovereign spreads that significantly raises the coefficient of fit (R2 ). Third, the model uses macroeconomic fundamentals and gover- nance indicators specific to each country as explanatory variables, instead of proxies for repayment capacity. These proxies, generally ratings or other holistic constructs, are usually subject to criticism regarding the methodology for scale conversion or their ability to predict currency crises in Asian-Pacific economies.5
Furthermore, the proposed model analyzes the country-specific vulnerability (sensitivity) to a global risk shock. Such elasticities are further decomposed into eco- nomic fundamentals and governance indicators, with the objective of assessing whether, and to what extent, country vulnerability can be mitigated by improving such variables.
Sovereign lending, throughout history, has been marked by occurrences of partial default and repudiation by governments of all kind; from medieval princes to dictators to democratic regimes. In the 1970s lending to lesser-developed countries led to the rescheduling and partial defaults in the 1980s. Even the sustainability of the debt of nations such as Belgium, Canada, Italy and even the United States is not free from suspect.
Rhee, C., & Song, E. Y. (2013). Trade Finance and Trade Collapse during the Global Financial
US-China share a significant relation in terms of trade which has expanded substantially over past three decades. This can be understood by the fact that total trade between U.S and china grew exponentially from $2 billion in 1979 to staggering $562 billion by year end of 2013. Currently China is United States second largest partner in terms of trading, its third-largest market for export, and its biggest import source. With a total estimate of approximately $300 billion China is one of the biggest market for U.S. firms (this fact is based on U.S. exports to China and sales by US firms which have significant investment in China). In fact for many companies it is important to participate in China’s market to stay relevant and competitive in current business scenario. For example automobile major General Motors (GM) has invested heavily in China, sold more cars in China as compared to United States for year range 2010-2013. Whereas on other hand, consumer in United States benefit greatly from the import of low-cost goods from Chinese manufacturer. Currently China is rated as the largest foreign holder of US Treasury securities (approximately $1.4 trillion as of December 2013). Another major aspect is that because of China’s purchases of US government debt has helped United States in keeping the prevailing interest rates low.
According to Kim (2000), utilizing bond markets for financing is important for several reasons: (i) it helps to diversify the sources of infrastructure financing; (ii) it alleviates the uncertainties caused by the global bank disintermediation; (iii) it contributes to transforming short-term bank deposit into long-term development resources; and (iv) it contributes to enhancing ...
Many critics have stated that the economic crack in 2008 has exposed the weaknesses in the traditional financial models including risk free rate. As a traditional cost of equity input there has been a significant decline in yields on risk free government securities. At the time many central banks brought up much of the medium and long-term bonds which some say is a cause of the lower yields (Grabowski, 2014).
The active secondary market for high-grade municipal bonds act as a mitigant to short term/ market session price volatility. Average daily trading volume in the municipal market is $10Bn. According to Merrill Lynch, the average typical bid offer spread is 1/4bps on 70% of the trades, ½bps on 20% of the trades and up to 4bps on the remaining. According to Bear Stearns and Lehman Brothers the typical bid/offer spread is 1/2bps on 75% of the trades. These tight spreads in the municipal market (particularly the high-grade market) act to mitigate against wide swings in the market which could lead to market losses on a municipal bond portfolio. Therefore, under a liquidation scenario, we feel confident that the collateral can be sold in a short time frame and with little risk of market price deterioration.
Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.
Country's policies potentially affect a country’s vulnerability to debt-serving problems, particularly if the external economic environment becomes unfavorable.
Southeast Asia financial crisis started in Thailand currency crisis, and Thailand currency crisis has been brewing as early ...
...ischer, Stanley. "The Asian Crisis: A View from the IMF." International Monetary Fund. Washington, D.C.: 22 Jan 1998. 30 Nov 2001 <http://www.imf.org/external/np/speeches/1998/012298.htm>.
PBS. "Timeline of Asian Financial Crisis." PBS. PBS, 1 Mar. 2000. Web. 29 Mar. 2014. .
The overwhelming spread of the global crisis and poses great challenges for the Asian and Pacific regions as well as Vietnam. Vietnam is known as one of the most open economies of the globe and it relies deeply on external capital sources (e.g. FDI or ODA) to support its development demands. Thus, Vietnam is highly vulnerable to the vast effects of the financial crisis on global trade and financial flows.
In this case, the sovereign spread is compensating for currency risk. There have similarities of characteristics between currency risk and country risk. Basically, currency risk is risk arises due to the changes in exchange rate while country risk is risk that arise when investing in a foreign country. The higher the sovereign spread means the higher the demand for the dollar to balance the yield. The share price is correlated with the sovereign spread so the investor must calculate the weighted average cost of capital that reflects the currency
7. IMF staff. (June 2000). Recovery from the Asian Crisis and the Role of the IMF. International Monetary Funds. Retrieved April 27, 2008 from,
Ferguson et al. International financial stability. Geneva: International Center for Monetary and Banking Studies, 2007. Print.