Lost and Found: Market Access and Public Debt Dynamics

The  empirical  literature  on  sovereign  debt  crises  identifies  the  level  of  public debt (measured as a share of GDP) as a key variable to predict debt defaults and to determine sovereign market access. This evidence has led to the widespread use of (country-­‐specific) debt thresholds to assess debt sustainability. We argue that the level of the debt-­‐to-­‐GDP ratio, whose use is justified on a theoretical and empirical ground, should not be the only fiscal metric to assess the complex relationship between public debt and debt defaults/market access. In particular, we show that, in a large panel of emerging markets, the dynamics of the debt ratio plays a critical role for market  access.  In  particular,  given  a  certain  level  of  debt,  a  steadily  declining  debt  ratio  is  associated  with  a  lower  probability  of  debt distress/market loss and with a higher likelihood of market re-­‐access once access had been lost.