Risk premium on sovereign bonds and budgetary discretion vs. rules for a developing country: the case of Brazil

Abstract

Given the current stabilization policies, the Brazilian economy gives a vivid example of the impact of several factors, such as the degree of institutionalization of the budgetary and monetary policies that are followed since the implementation of the Real Plan, on its policy-credibility and, as such, on the market s perception of the default risk on its external debt. This paper elaborates on the research question: Risk premium on sovereign bonds and budgetary discretion vs. rules for a developing country: a theoretical model and application to Brazil . First, a theoretical model is developed, modeling the risk premium on sovereign bonds depending on the type of fiscal policy regime (weak or tough) in a signaling setting. Then, from the theoretical model an empirical model is derived, which is estimated with data for Brazil. The theoretical model gives a framework of modeling credibility of a government, signaling its type, as well as the credibility whether the government, independent of its type, comes in the situation that the costs of repaying the debt become unfavorably high, that defaulting seems unavoidable. The preliminary conclusions that can be drawn from the empirical results are favorable to modeling the risk premium in terms of a government s fiscal policy credibility, and confirm earlier results that for Brady bonds a country s solvency is of more importance, and for Eurobonds its (short run) liquidity.

O projeto de pesquisa é parte do projeto entitulado 'Credibilidade de Políticas Monetárias e Fiscais para o Brasil: Risco Soberano, Instituições, Âncoras Nominais, e Acesso aos Mercados Financeiros Internacionais'. Dentro do atual plano de estabilização, um estudo empírico sobre a economia brasileira fornece um exemplo vívido do impacto de vários fatores, como o grau de institucionalização das políticas monetárias e orçamentárias que tem sido utilizadas desde a implementação do Plano Real, que aumentariam a credibilidade, sustentando a política cambial e o fluxo positivo do capital internacional, na percepção do mercado do risco de suspensão de pagamento (default risk) da dívida externa de um país em desenvolvimento. O foco dentro deste projeto de pesquisa será na questão de pesquisa: 'Prêmio sobre o risco (risk premium) dos títulos soberanos e política fiscal discricionária vs regras de política fiscal para um país em desenvolvimento: o caso do Brasil'.