Sovereign Debt Without Default Penalties

Guembel, Alexander; Sussman, Oren

doi:10.2139/ssrn.885434

Cited by 67 publications

(78 citation statements)

References 29 publications

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“…Furthermore, the assumption of non-discrimination in taxation is a common assumption in the literature (Broner and Ventura, 2011;Guembel and Sussman, 2009;Gennaioli et al, 2009). …”

Section: Discussionmentioning

confidence: 99%

“…The second strand of the literature that is closely related to this paper includes a number of recent papers that focus on the direct consequences of sovereign default on the domestic private sector (e.g., Ventura, 2011, 2008;Guembel and Sussman, 2009;Gennaioli et al, 2009). 5 These papers have in common with mine the assumption that government's repayment is non-discriminatory across domestic and foreign creditors, but they emphasize different implications: the welfare and distributional effects of default, the political process governing sovereign repayment and the interaction between private and public capital flows, respectively.…”

Section: Introductionmentioning

confidence: 99%

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Sovereign defaults and liquidity crises

Brutti

2011

Journal of International Economics

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Sovereign debt crises in emerging markets are usually associated with liquidity and banking crises. The conventional view is that the domestic financial turmoil is the consequence of foreign retaliation, although there is no clear empirical evidence on "classic" default penalties. This paper emphasizes instead a direct link between sovereign defaults and liquidity crises, building on two natural assumptions: (i) government bonds represent a source of liquidity for the domestic private sector; (ii) the government cannot discriminate between domestic and foreign creditors in the event of default. In this context, external debt emerges even in the absence of classic penalties and government default is counter cyclical, triggers a liquidity crunch, and amplifies output volatility. In addition, a financial reform that involves a substitution of government bonds with privately-sourced liquidity instruments could backfire by restricting government's access to foreign credit. This paper emphasizes instead a direct link between sovereign defaults and liquidity crises, building on two natural assumptions: (i) government bonds represent a source of liquidity for the domestic private sector; (ii) the government cannot discriminate between domestic and foreign creditors in the event of default. In this context, external debt emerges even in the absence of classic penalties and government default is countercyclical, triggers a liquidity crunch, and amplifies output volatility. In addition, a financial reform that involves a substitution of government bonds with privately-sourced liquidity instruments could backfire by restricting government's access to foreign credit.

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“…Furthermore, the assumption of non-discrimination in taxation is a common assumption in the literature (Broner and Ventura, 2011;Guembel and Sussman, 2009;Gennaioli et al, 2009). …”

Section: Discussionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Sovereign defaults and liquidity crises

Brutti

2011

Journal of International Economics

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“…3 As more and more of a country's debt is held by domestic financial institutions, or is critical to facilitating domestic financial transactions because it is perceived as lowrisk interest bearing collateral, default on sovereign bonds becomes costly; Default automatically hurts domestic activity by rendering domestic banks insolvent, or reducing activity in financial markets (see especially Bolton andJeanne (2011) or Gennaioli, Martin, andRossi (2011)). If the government cannot default selectively on foreign holders of its debt only, either because it does not know who owns what, or it cannot track sales by foreigners to domestics (see Guembel and Sussman (2009) and Broner,4 Martin, and Ventura (2010) for rationales), then it has a strong incentive to avoid default and make net debt repayments to all, including foreign holders of its debt.…”

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confidence: 99%

Sovereign Debt, Government Myopia, and the Financial Sector

Acharya¹,

Rajan

2011

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What determines the sustainability of sovereign debt? We develop a model where myopic governments seek popularity but can nevertheless commit credibly to service external debt. They do not default when debt is low because they would lose access to debt markets and be forced to reduce spending; they do not default as debt builds up, and net new borrowing becomes difficult, because of the adverse consequences from default to the domestic financial sector. More myopic governments default less often, but tax in a more distortionary way and increase the vulnerability of the domestic financial sector to future government debt default.

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“…Cole and Kehoe (1998) and Sandleris (2006) argue that a sovereign default serves as a negative signal, inducing parties outside of the credit relationship to initiate actions that are costly for the government. Tabellini (1991), Dixit and Londregan (2000), Kremer and Mehta (2000), Niepelt (2004) or Guembel and Sussman (2009) argue that distributive motives can counteract a sovereign's incentive to default. More direct default costs of the type considered here are present, for example, in the models of Bulow and Rogoff (1989a), Bulow and Rogoff (1989b), Cole and Kehoe (2000), Aguiar and Gopinath (2006) and Arellano (2008).…”

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confidence: 99%

Debt maturity without commitment

Niepelt

2014

Journal of Monetary Economics

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This paper analyzes how sovereign risk paired with social costs of default shape the government debt maturity structure. Governments balance benefits of default induced redistribution and costs due to income losses in the wake of a default. Their choice of short-versus long-term debt issuance affects default and rollover decisions by subsequent policy makers whose price impact gives rise to revenue losses on inframarginal units of debt. When considering whether to issue additional debt of a certain maturity, the government weighs the benefit of smoothing disposable income and the cost due to these revenue losses. Consistent with the evidence, the model predicts an interior maturity structure with positive gross positions; the maturity structure shortens when debt issuance is high, output low, output volatility low, or a cross default more likely.

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Sovereign Debt Without Default Penalties

Cited by 67 publications

References 29 publications

Sovereign defaults and liquidity crises

Sovereign defaults and liquidity crises

Sovereign Debt, Government Myopia, and the Financial Sector

Debt maturity without commitment

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