Does Your Neighbor's Debt Crowd Out Yours?

The Essex Finance Centre (EFiC) warmly invites you to join the research seminar with Dr Irem Demirci from the Nova School of Business and Economics.

There is ample evidence in the literature for government debt crowding out of corporate debt, yet we know little about crowding out among public sector debt of different countries, international crowding out. Based on a panel of 52 countries from five different regions over the period between 1995 and 2020, we document a positive association between individual sovereign yields and regional debt supply. This result is robust to different types of debt, different proxies for sovereign yields and holds in alternative subsamples.

In further analysis, we find that the international crowding out effect is more prominent for long-term debt and foreign-currency debt. The sovereign yields of countries that depend on capital markets, foreign investors, and countries with more budget deficits and long-term debt due are more sensitive to changes in regional debt. Our results cannot be explained by regional risk or flight to quality motive. To alleviate endogeneity concerns, we provide two event study analyses, one around the introduction of the Euro and another around the announcement of the inclusion of Chinese government bonds in a major sovereign bond index. In addition, we use country-level damages resulting from natural disasters to instrument for regional debt in a two-stage least squares framework.

Finally, we extend our analysis to mutual fund holdings of sovereign debt and find supporting evidence to our proposed international crowding out channel. Overall, our results indicate that governments can crowd out each other's debt, increasing the cost of sovereign issues.

Please note that the date of this event has changed from 4 March to 29 April 2026.