This paper analyzes determinants of country default risk in emerging markets, reflected by sovereign yield spreads. The results reported so far in the literature are heterogeneous with respect to significant explanatory variables. This could indicate a high degree of uncertainty about the “true” regression model. We use Bayesian Model Averaging as the model selection method in order to find the variables which are most likely to determine credit risk. We document that total debt, history of recent default, currency depreciation, and growth rate of foreign currency reserves as well as market sentiments are the key drivers of yield spreads.

We analyze the determinants of sovereign default risk of EMU member states using government bond yield spreads as risk indicators. We focus on default risk for different time spans indicated by spreads for different maturities. Using a panel framework we analyze whether there are different drivers of default risk for different maturities. We find that lower economic growth and larger openness increase default risk for all maturities. Higher indebtedness only increases short-term risk, whereas net lending, trade balance and interest rate costs only drive long-term default risk.