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This paper studies the extent to which macro-economic variables govern the dynamics of emerging markets sovereign CDS spreads. The author proposes a structural model of sovereign credit risk based on observed exports, imports and international reserves. Using these macro fundamentals, the author defines a country's ability to pay as the maximum amount of foreign currency available for repayment of non-domestic debt. The joint dynamics of the ability to pay and a sovereign's outstanding external debt determine the level of country default risk and thus the CDS spreads. The author implements the model for a sample of 6 emerging economies for a period covering the recent financial crisis.
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