Sovereign borrowing, financial assistance, and debt repudiation

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract Official lenders provide financial assistance to countries that face sovereign debt crisis. The availability of financial assistance has counteracting effects on the default incentives of governments. On the one hand, financial assistance can help to avoid defaults by bridging times of fundamental crises or resolving coordination failures among private investors. On the other hand, the insurance effect of financial assistance lowers borrowing costs which induces the sovereign to accumulate higher debt levels. To assess the overall effect of financial assistance on the probability of default we construct a quantitative model of endogenous credit structure and sovereign default that allows for self-fulfilling expectations of default. Calibrating the model to Argentinean data we find that the availability of financial assistance reduces the number of defaults that occur due to self-fulfilling runs by private investors. However, at the same time it raises average debt levels causing an overall increase of the probability of default. Terms of use: Documents in

Sovereign and private default risks over the business cycle

“…Hatchondo and Martinez (2009), Arellano and Ramanarayanan (2012) and Chatterjee and Eyigungor (2012)), or bailouts (e.g. Roch and Uhlig (2014), Fink and Scholl (2014), Kirsch and Rühmkorf (2013)). In all these papers, there is no credit to the private Different from ours, however, they assume that firms are always able to borrow at the risk-free rate, which is at odds with the evidence.…”

Welfare gains of bailouts in a sovereign default model

“…Our work also relates to the work of Corsetti et al (2006), Roch and Uhlig (2018), Bianchi and Mendoza (2011), Pancrazi and Zavalloni (2019), and Kirsch and Rühmkorf (2015) who study the role of official lending in various settings. We also related to Jeanne and Zettelmeyer (2001) who, in a policy oriented paper, discuss the implications of international bailouts and conditionality in relation to moral hazard.…”

Introduction to the Special Issue on Models of Debt and Debt Crises

“…This leaves open the important question of whether the existence of these programs affects the probability that a crisis arises in the first place. Kirsch and Rühmkorf (2017) develop a theory, based on that of Arellano (2008), to answer this question. They find that financial assistance programs reduce the likelihood of self-fulfilling runs but allow countries to accumulate more debt in total.…”