Journal of Monetary Economics 2017 DOI: 10.1016/j.jmoneco.2017.06.005 View full text
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Juliana Salomao

Abstract: A credit default swap (CDS) contract provides insurance against default. After a country defaults, the country and its lenders usually negotiate over the share of the defaulted debt to be repaid. This paper incorporates CDS contracts into a sovereign default model and demonstrates that the existence of a CDS market results in lower default probability, higher debt levels, and lower nancing costs for the country. Since the CDS payout is not automatically triggered by losses from renegotiations, the lender needs…

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