1. Discussion Determinants of Sovereign Risk Premiums for European Emerging Markets (From Saints to Sinners?) Mirna Dumicic and Tomislav Ridzak Paul Wachtel New York University 16 th Dubrovnik Economic Conference - YES June 23, 2010

2. What do the authors set out to do? Explain sovereign risk spreads with a reduced form model using panel data Explain sovereign risk spreads with a reduced form model using panel data 8 CEECs, quarterly data 2004-20098 CEECs, quarterly data 2004-2009 Particular question Particular question What were the determinants of the increases in spreads during the 2008-09 world financial crisis?What were the determinants of the increases in spreads during the 2008-09 world financial crisis? Did the saints become sinners?Did the saints become sinners?

3. Take a look at the data Figure 1 Spreads were trending down – a bit Spreads were trending down – a bit Increased in 2008 Increased in 2008 Spiked in 2009 Spiked in 2009 Three countries had much muted spikes: PL, SK, CRThree countries had much muted spikes: PL, SK, CR Did crises lead to differences in macro fundamentals in these three countries or did it lead to differences in risk assessmnet?Did crises lead to differences in macro fundamentals in these three countries or did it lead to differences in risk assessmnet? What was different in these three countries? What was different in these three countries?

4. Model Reduced form with explanatory suggested in literature 1. Macro indicators – GDP, inflation 2. Solvency indicators – Curr acct, debt 3. EU/EMU convergence 4. Global risk (volatility) - VIX

5. Econometric issues Time series properties – stationarity, cointegration Time series properties – stationarity, cointegration Is regression appropriate?Is regression appropriate? Simultaneity Simultaneity Clustered errors or GLS Clustered errors or GLS Measurement of EU/EMU convergence – specific scaling for a qualitative variable Measurement of EU/EMU convergence – specific scaling for a qualitative variable Robustness with regard to other rates Robustness with regard to other rates

6. What do results really show? VIX is highly significant but what does it tell us? VIX is highly significant but what does it tell us? Dummying out the crisis period would do just as well. Dummying out the crisis period would do just as well. Some countries are less vulnerable to an increase in global risk - but why? Some countries are less vulnerable to an increase in global risk - but why? We discover that some countries avoid the tempt to sin. But we never really know why. We discover that some countries avoid the tempt to sin. But we never really know why.