# 97-076/2 (1997-07-11)

Jolanda Eline IJgosse, University of Amsterdam
default risk; sovereign debt; Brady/ Eurobonds; solvency-; liquidity-measures; seniority of debt
JEL codes:
E44; F34

This paper gives an empirical analysis of the importance of both economic and political country-specific variables in pricing developing country bonds. Furthermore, the impact of international interestrate movements on the yield spread paid on a developing country bond over a comparable risk-freeasset is included in the analysis. The paper builds on a large number of earlier empirical papers_newinvestigating the possible determinants of default probabilities and adopts a theoretical model asdescribed in Edwards (1984). The findings are broadly in line with those of the earlier studies. Thepaper adds some new insights, showing that investors consistently treat Brady bonds (rescheduled olddebt) differently from Eurobonds (new issues). Also, computed probabilities of default for the formerare found to be consistently lower than for the latter. This clearly shows the market's recognition of theseniority of Brady bonds over Eurobonds.