The Dynamics of Sovereign Debt Crises and Bailouts

Author/Editor:

Francisco Roch ; Harald Uhlig

Publication Date:

July 11, 2016

Electronic Access:

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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.

Series:

Working Paper No. 16/136

Subject:

English

Publication Date:

July 11, 2016

ISBN/ISSN:

9781475581027/1018-5941

Stock No:

WPIEA2016136

Format:

Paper

Pages:

46

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