Sovereign spillovers normalised Asian spreads, says IMF study

The rapid normalisation of sovereign spreads experienced in Asian countries following the crisis owed largely to positive spillover effects, an IMF study, published on Wednesday, shows.

Carlos Caceres and Filiz Unsal, the paper's authors, estimate a model of Asian sovereign swap spreads in Australia, Japan, New Zealand, China, Hong Kong, India, Indonesia, Korea, Malaysia, the Philippines and Thailand to examine how contagion in these economies evolved during different phases of the crisis. The authors analyse the extent to which the large fluctuations observed in Asian sovereign spreads reflect changes in global risk aversion, the insurgence country-specific risk, increased exchange rate risk and contagion from other countries.

The results show that for the vast majority of Asian economies, sovereign risk spillovers were the main drivers of developments in sovereign spreads. Caceres and Unsal show that following the collapse of Lehman Brothers, contagion contributed significantly to the spike observed in Asia's sovereign spreads. However, they say this reversed in April 2009 as the financial spillovers were contained and systemic risk in the global banking sector subsided. Positive spillovers among sovereigns subsequently drove a rapid normalisation of Asian sovereign spreads, which since October 2009 has remained broadly stable, the authors say.

Click here to read the paper.