| Date: |
2018 |
| Abstract: |
Sovereign risk premia reflect investors' beliefs for the equilibrium and off -equilibrium actions of international agents. This paper investigates the international dimension of self-fulfilling sovereign debt crises and characterizes self-interested bailouts (solidarity) and contagion. A credible bailout guarantee by a partner country or international agency can lower a debtor country's borrowing costs and reduce the probability of belief driven default. However, time consistency undermines an international agent's ability to commit to intervention. Investors internalise the probability that a bailout never materializes and this endogenously increases its cost. Hence solidarity will generally be insufficient to rule out non-fundamental equilibria, explaining why high sovereign debt yields can persist despite guarantees. When countries are heavily indebted, expectations of default in one country's debt market can result in the default of its economic partner. Moreover, while large international agents are able to resolve the coordination failure, in contrast to the market, they internalise spillover costs of default and cannot credibly enforce repayment. Introducing information asymmetries results in novel on-equilibrium debt dynamics. |
| Abstract: |
The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396. |
| Grants: |
European Commission 649396
|
| Rights: |
Aquest document està subjecte a una llicència d'ús Creative Commons. Es permet la reproducció total o parcial, la distribució, la comunicació pública de l'obra i la creació d'obres derivades, fins i tot amb finalitats comercials, sempre i quan es reconegui l'autoria de l'obra original.  |
| Language: |
Anglès |
| Series: |
Barcelona Graduate School of Economics. ADEMU working paper series |
| Series: |
ADEMU Working Paper Series ; 136 |
| Document: |
Working paper |
| Subject: |
Sovereign risk and default ;
Self-fulfilling crises ;
Bailouts |
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