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We investigate the role of "country risk" in determining the
default risk of firms in emerging markets. In particular, we study
the relationship between the secondary market spreads (over
hard-currency government bond yields) of bonds issued by emerging
market firms and bonds issued by their home governments over the
past 3 1/2 years. Our results indicate that market participants do
not strictly apply the "sovereign ceiling," under which no firm is
more creditworthy than its government. We do find that the spreads
of emerging market corporate and government bonds over
hard-currency government bonds are highly correlated. The
correlation is higher for some industries than for others, and we
find no evidence that banks face greater country risk.
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