Quantifying Risks to Sovereign Market Access

We use the euro area debt crisis experience to study episodes when sovereigns lose access to bond markets. We construct a detailed dataset with potential leading indicators and evaluate their ability to forecast episodes when market access is lost. We show that factors capable of foreseeing market tensions go beyond traditional metrics of the fiscal stance and of global and domestic macroeconomic conditions. Variables that describe conditions in primary and secondary sovereign bond markets are key predictors of market access tensions. We construct simple indices and multivariate models and use them to predict market access tensions. Simple indices capture worsening conditions but yield unsatisfactory out-of-sample results. Multivariate models generate better forecasts highlighting how tools to evaluate risks to sovereign market access trade off communicability and accuracy. Finally, we show the importance of accounting for different policymakers’ preferences.