Market Access and High Spread Issuances

We investigate the factors determining emerging markets’ likelihood to access international capital markets. First, we develop a simple model to outline the theoretical foundations of market access, highlighting the role of risk, spreads, net worth, and the cost of repaying debt. The model also shows a trade-off between risk insurance and moral hazard and underscores the relevance of unconventional instruments such as guarantees and macro-contingent debt. Second, we estimate a random forest model to assess the key predictors of market access. We find that outstanding obligations, reserves, short-term external debt, EMBIG spreads and the size of the economy are key predictors of market access. Important non-linear effects include an inverted U-curve for the effect of spreads on likelihood of issuance; a positive relationship between likelihood of issuance and external debt at low spreads that turns negative at high spreads; and a high sensitivity to governance only for high spreads. Finally, we collect a novel dataset and examine the characteristics of high spread issuances, which are often unconventional and include guarantees, contingencies or collateral, in line with what theory predicts.