Emerging Market Spreads at the Turn of the Century: A Roller Coaster

Abstract

This paper examines the empirical behavior of monthly secondary spreads from eighteen emerging market economies located in Asia, East Europe and Latin America from October 1997 to September 2002, a particularly turbulent period. A succession of events affected these economies such as the Asian crisis, the Russian default, the Brazilian devaluation, the Ecuadorian default, the Turkish crisis and the Argentine default. Our empirical estimations allow us to construct taxonomy of these crises. First, the Russian default and the Turkish crisis correspond to episodes of global reduction of portfolio flows to emerging sovereign debt markets. Second, the Brazilian devaluation was fundamentally an abatement of portfolio flows to Latin America and East Europe (except for Russia). Third, the Asian crisis and the Ecuadorian default were consistent with a rebalancing of portfolios in emerging markets. Fourth, although the Argentine crisis shares some similarities with the former crises, it is unique in the sense that it was fully anticipated long before it happened. Finally, in light of these results, policy-makers in emerging markets should be keenly aware of the possibility that their country might be hit by a crisis so structural reforms should also include policies that help to protect the country from these unruly episodes.