Convergence and Divergence of Sovereign Bond Spreads : Theory and Facts from Latin America

The aim of this paper is to identify the macroeconomic determinants of sovereign bond spreads in Argentina, Brazil and Mexico and discuss the economic policies underlying the divergent fortunes experienced by these countries over 1993-2001. Based on a consistent theoretical framework (unlike a bulk of the former literature), we derive and empirically test those determinants, namely: a) real GDP growth; b) gross capital inflows in GDP terms, and c) the debt service burden, also measured as percentage of GDP. Our econometric analysis suggests that a permanent change in the former variables have a more significant and robust impact than transitory shocks do on spreads. It also stresses that financial contagion or risk-aversion variables have some meaningful role in explaining default premia across different emerging market crises