The Asia-Pacific markets have enjoyed an extremely favorable economic climate driven by high global liquidity over the past three years. In 2006, for example, excess liquidity and the overall positive economic performance of these countries led to the lowest sovereign spreads in history falling below 200 basis points, as shown in Figure 1. Among the mechanisms that contribute contributing to this process are: 1) low interest rates in mature markets (United States, United Kingdom, Europe and Japan), which until recently had been declining due to the bursting of the dotcom bubble in 2000; 2) the steep yield curve, which provides incentives to hold leveraged positions; and 3) the low long-term interest rates in the United States relative to the country's economic growth rate. Overall liquidity, along with the reduced perception of risk it creates, have encouraged global institutional investors to take strategic positions in Asia-Pacific markets. , thus further narrowing spreads. Furthermore, the average credit rating provided by international rating agencies for the countries comprising EMBI+ has risen to its highest level ever (Ba1/BB+ as of September 2006), further broadening the investor base. This scenario has allowed Asia-Pacific economies to finance their debt through local currency issues on domestic and foreign markets, thus allowing them to improve the composition of their public debt by extending its maturity profile, reducing the share denominated in foreign currency foreign and accumulating reserves. However, the crucial question for Asia-Pacific markets is whether the current level of sovereign spreads is sustainable in the face of a potential reversal of cyclical factors, such as those involving liquidity, which...... middle of paper ... ...the dependent variable (interest rate), a common approach to determining sovereign spreads that significantly increases the fit coefficient (R2). Third, the model uses country-specific macroeconomic fundamentals and governance indicators as explanatory variables, rather than proxies for repayment capacity. These proxies, generally ratings or other holistic constructs, are usually subject to criticism regarding the methodology for scaling or their ability to predict currency crises in Asia-Pacific economies.5 Furthermore, the proposed model analyzes the Country-specific vulnerability (sensitivity) to a global risk-related shock. These elasticities are further broken down into economic fundamentals and governance indicators, with the aim of evaluating whether, and to what extent, the country's vulnerability can be mitigated by improving these variables..