Sovereign Debt

IMF Working Papers, June 17, 2022

Source details

Authors: Leonardo Martinez, Francisco Roch, Francisco Roldán, Jeromin Zettelmeyer
Published: June 17, 2022
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400213250.001

Paper surveys the literature on sovereign debt focusing on how sovereign debt differs from privately issued debt and why sovereign debt is deemed safe in some countries but risky in others.
Emphasizes the unique power of the sovereign:
- Power to tax, making debt relatively safe.
- Control over territory and most assets, making debt enforcement difficult.
Discusses debt contracts and the sovereign debt market, sovereign debt restructurings, and empirical and theoretical literatures on the costs and causes of defaults.
Describes the adverse impact of sovereign default risk on issuing countries and the factors explaining this impact.
Concludes with policy options to reduce sovereign risk, including fiscal frameworks that act as commitment devices, state-contingent debt, and independent and credible monetary policy.

Distinctive sovereign powers create a dual nature of sovereign debt: safer because of taxation authority; riskier because of limited enforceability.
Debt contracts and market structures shape repayment outcomes and default incentives.
Sovereign debt restructurings are a central mechanism in resolving crises; literature covers contractual design and renegotiation processes.
Empirical and theoretical work identifies costs and causes of defaults, linking default events to macroeconomic and political factors.
Sovereign default risk imposes measurable adverse impacts on issuing countries; analysis explores channels and magnitudes of these impacts.

Fiscal frameworks that act as commitment devices to reduce sovereign risk.
State-contingent debt instruments to better share risk between sovereigns and creditors.
Independent and credible monetary policy to complement fiscal measures in reducing sovereign risk.

Subjects: Debt default, External debt, Financial crises, Financial markets, Fiscal policy, Fiscal rules, Public debt, Securities markets
Keywords: capital market exclusion, Costs of Sovereign Default, debt contract, Debt Default, Debt Restructuring, default decision, default event, Fiscal Frameworks, Fiscal rules, Global, liquid asset, market value, Original Sin, payment terms, Political Defaults, Safe Debt, Securities markets, short-term debt, Sovereign Debt, sovereign default, State Contingent Debt