Abstract:Dealing with default risk on sovereign debt became an urgent matter with the Financial Crisis of 2008. Depending on both exogenous and endogenous factors, the risk of eventual default may become significant over the lifetime of a loan. Creditors are then faced with a dilemma, since they cannot force the borrowing country into bankruptcy court. Should they ease repayment by reducing the principal of the debt (“forgiveness”), or should they offer an extra award if the borrower repays in full? The latter award co… Show more
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