{
  "title": "The Dynamics of Sovereign Debt Crises and Bailouts",
  "publication": "IMF Working Papers, July 11, 2016",
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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.",
  "sections": [
    {
      "heading": "Summary and research question",
      "content": "- Motivated by the recent European debt crisis, the paper investigates the scope for a bailout guarantee in a sovereign debt crisis.\n- Defaults may arise from:\n  - negative income shocks;\n  - government impatience;\n  - a \"sunspot\"-coordinated buyers strike.\n- The paper introduces a bailout agency and characterizes the minimal actuarially fair intervention that guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing."
    },
    {
      "heading": "Model features and mechanism",
      "content": "- Introduction of a bailout agency that provides a backstop guarantee.\n- Characterization of the minimal actuarially fair intervention required to sustain the fundamental (no-buyers-strike) equilibrium.\n- Interaction with the market for residual financing: the backstop reduces borrowing costs but does not eliminate private market participation."
    },
    {
      "heading": "Key findings",
      "content": "- The intervention makes it cheaper for governments to borrow, inducing them to borrow more.\n- Increased borrowing can leave default probabilities possibly rather unchanged.\n- The maximal backstop will be pulled precisely when fundamentals worsen.\n- Defaults in the model can be driven by multiple channels: income shocks, policy impatience, or coordination failures (\"sunspot\" buyers strike)."
    },
    {
      "heading": "Policy implications and considerations",
      "content": "- A targeted, actuarially fair bailout guarantee can stabilize creditor coordination and prevent buyer strikes without fully replacing private financing.\n- Lower borrowing costs from guarantees may create moral hazard by inducing greater debt accumulation—monitoring of borrowing incentives is essential.\n- Design of backstops should account for the timing: maximal support is used when fundamentals deteriorate, implying contingent and state-dependent intervention rules.\n\n---\n\n Content in this bundle\n\n- wp16136 - References\n  - wp16136 - References (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp16136 - References (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/the-dynamics-of-sovereign-debt-crises-and-bailouts-44077"
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    "Authors: Francisco Roch, Harald Uhlig",
    "Published: July 11, 2016",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781475581027.001",
    "Motivated by the recent European debt crisis, the paper investigates the scope for a bailout guarantee in a sovereign debt crisis.",
    "Defaults may arise from:",
    "The paper introduces a bailout agency and characterizes the minimal actuarially fair intervention that guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing.",
    "Introduction of a bailout agency that provides a backstop guarantee.",
    "Characterization of the minimal actuarially fair intervention required to sustain the fundamental (no-buyers-strike) equilibrium.",
    "Interaction with the market for residual financing: the backstop reduces borrowing costs but does not eliminate private market participation.",
    "The intervention makes it cheaper for governments to borrow, inducing them to borrow more.",
    "Increased borrowing can leave default probabilities possibly rather unchanged.",
    "The maximal backstop will be pulled precisely when fundamentals worsen.",
    "Defaults in the model can be driven by multiple channels: income shocks, policy impatience, or coordination failures (\"sunspot\" buyers strike).",
    "A targeted, actuarially fair bailout guarantee can stabilize creditor coordination and prevent buyer strikes without fully replacing private financing.",
    "Lower borrowing costs from guarantees may create moral hazard by inducing greater debt accumulation—monitoring of borrowing incentives is essential.",
    "Design of backstops should account for the timing: maximal support is used when fundamentals deteriorate, implying contingent and state-dependent intervention rules.",
    "**_wp16136 - References**"
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