OECD Development Centre Working Papers

The OECD Development Centre links OECD members with developing and emerging economies and fosters debate and discussion to seek creative policy solutions to emerging global issues and development challenges. This series of working papers is intended to disseminate the OECD Development Centre’s research findings rapidly among specialists in the field concerned. These papers are generally available in the original English or French, with a summary in the other language.

English, French

External Solvency, Dollarisation and Investment Grade

Towards a Virtuous Circle?

Due to the substantial rise in the share of Emerging Markets (EM) in foreigncurrency debt markets during the nineties, country risk in EM has become an issue of increasing concern for both new bond issues and rescheduled non-performing loans. However, as recent episodes show, financial volatility has tended to leave those countries more prone to contagion effects and balance-of-payments crises. Consequently, international bond investors have required higher risk premia to balance the risk-return equation. In order to make Emerging Markets less vulnerable to external shocks, exchange-rate corner solutions such as dollarisation have been proposed. One of the main arguments put forth by the dollarisation supporters is the expected decrease in sovereign spreads, as currency risk will no longer hold. According to this “optimistic” view, which also relies on a credibility spillover effect, such a decrease could begin improving solvency weaknesses while boosting economic growth ...


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