Linkages across sovereign debt markets

No 414, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies linkages across sovereign debt markets when debt is unenforceable and countries choose to default and renegotiate. In the model countries are linked to one another by borrowing from a common lender. Borrowing from a common lender connects borrowing rates across countries as well as the renegotiation arrangements. Default of one country lowers the lenderÂ’s wealth which in turn increases the borrowing rate for the other countries. Higher interest rates could then lead to a second default and an even lower wealth for the lender. Foreseeing these events, the lender accepts a lenient haircut from the Â…rst defaulter country. The model can rationalize some of the recent events in Europe.

Date: 2012
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Related works:
Working Paper: Linkages across sovereign debt markets (2013)
Working Paper: Linkages across Sovereign Debt Markets (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:414

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