Peer Pressure: How Relative Debt Drives Emerging Market Sovereign Spreads

This paper shows that sovereign bond spreads are shaped not only by absolute debt levels but also by a country’s relative debt position within its peer group. Using panel fixed effects for over 80 emerging and developing economies over 1993-2024, we find that relative debt—especially benchmarked by income and commodity status—has greater explanatory power for spreads than gross debt alone. A one–standard deviation increase in relative debt raises spreads by roughly 0.2–0.3 standard deviations, comparable in magnitude to global risk indicators. Similarly, a 10 percent increase in relative debt is associated with a 3.8 percent increase in sovereign spreads, all else equal. The effect of relative debt is state-dependent, being stronger in countries with better institutions, access to concessional lending, and during periods of low risk aversion and ample global liquidity. These results hold across alternative specifications, sample periods, methodologies, and controls, which underscores the comparative nature of investor assessments and the importance of benchmarking for fiscal policy, debt management, and international surveillance.