The Dynamics of Sovereign Debt Crises and Bailouts

July 11, 2016

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Format: Chicago

Francisco Roch, and Harald Uhlig. The Dynamics of Sovereign Debt Crises and Bailouts, (USA: International Monetary Fund, 2016) accessed December 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Motivated by the recent European debt crisis, this paper investigates the scope for a bailout guarantee in a sovereign debt crisis. Defaults may arise from negative income shocks, government impatience or a "sunspot"-coordinated buyers strike. We introduce a bailout agency, and characterize the minimal actuarially fair intervention that guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing. The intervention makes it cheaper for governments to borrow, inducing them borrow more, leaving default probabilities possibly rather unchanged. The maximal backstop will be pulled precisely when fundamentals worsen.

Subject: Debt default, External debt, Financial crises, Financial markets, Income, National accounts, Public debt, Securities markets

Keywords: Bailouts, Debt crisis, Debt default, Debt level, Debt price, Debt purchase, Default, Endogenous Borrowing Constraints, Eurozone Debt Crisis, Gdp ratio, Government debt, Government default, Income, Long-term Debt, OMT, Purchase assistance, Purchase guarantee, Secondary market, Securities markets, Self-fulfilling Crises, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/136
Stock No:

WPIEA2016136
ISBN:

9781475581027
ISSN:

1018-5941

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