The political economy of sovereign defaults

Andreasen, Eugenia; Sandleris, Guido; Ghote, Alejandro Van der

doi:10.1016/j.jmoneco.2018.09.003

Cited by 54 publications

(22 citation statements)

References 16 publications

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“…This is not the case, however, for proxies capturing government unwillingness to pay, such as government ideology or elections. Overall, these findings are in line with recent theory work by Andreasen et al (2016) showing how governments may lack the political capacity to repay and deal with their foreign creditors in times of domestic pressure and instability. When the executive faces severe political turmoil, it proves hard to settle defaulted debt quickly.…”

Section: Introductionsupporting

confidence: 89%

“…The relevance of political stability and political constraints is also reflected in recent theory work on sovereign default and restructurings. Andreasen et al (2016) find that a government may lack the political support to repay foreign creditors and implement its fiscal policy plans. As a result, defaults can occur due to political inability-to-pay.…”

Section: The Politics Of Debt Restructurings: Unwillingness or Inabilmentioning

confidence: 99%

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Resolving sovereign debt crises: the role of political risk

Trebesch

2018

Oxford Economic Papers

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Sovereign defaults are bad news for investors and debtor countries, in particular if a default becomes messy and protracted. Why are some debt crises resolved quickly, in a matter of months, while others take many years to settle? This paper studies the duration of sovereign debt crises based on a new dataset and case study archive on debt renegotiations between governments and foreign banks and bondholders. Using Cox proportional hazard models, I find that domestic political instability ('political risk') is a significant predictor of negotiation delays, after controlling for macroeconomic conditions. Government crises, resignations, and street protests are particularly disruptive for a quick settlement process. Overall, the evidence suggests that debtor countries often lack the political ability to resolve a debt crisis. Governments in turmoil are unlikely to exit a default quickly.

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Section: Introductionsupporting

confidence: 89%

Section: The Politics Of Debt Restructurings: Unwillingness or Inabilmentioning

confidence: 99%

Resolving sovereign debt crises: the role of political risk

Trebesch

2018

Oxford Economic Papers

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“…, g} and associated transition probability matrix F (g t+1 , g t ). 7 The processes for 7 Nothing prevents consumption for agents with sufficiently low income from becoming nonpositive in default states (i.e., c t = y t (1 − τ y ) − φ(g) − g t + τ y Y ≤ 0), although this does not happen in our quantitative exercises. Ruling this out would require a restriction on the y and g processes to ensure positive consumption y and g are assumed to be independent for simplicity.…”

Section: Governmentmentioning

confidence: 97%

“…They show how lack of commitment and fiscal policy coordination leads countries to overborrow due to a fiscal externality, focusing on public debt traded across countries by risk-neutral investors, instead of default on risk-averse domestic debt holders. Andreasen et al [7] and Jeon and Kabukcuoglu [38] study models in which domestic income heterogeneity plays a role in the determination of external defaults, and Arellano et al [9] and Rojas [49] study sovereign risk in models with heterogeneous firms.…”

Section: Figure 1: Eurozone Debt Ratios and Spreadsmentioning

confidence: 99%

History Remembered: Optimal Sovereign Default on Domestic and External Debt

D’Erasmo,

Mendoza

2019

Working Paper (Federal Reserve Bank of Philadelphia)

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Infrequent but turbulent overt sovereign defaults on domestic creditors are a "forgotten history" in macroeconomics. We propose a heterogeneous-agents model in which the government chooses optimal debt and default on domestic and foreign creditors by balancing distributional incentives versus the social value of debt for self-insurance, liquidity, and risk-sharing. A rich feedback mechanism links debt issuance, the distribution of debt holdings, the default decision, and risk premia. Calibrated to Eurozone data, the model is consistent with key long-run and debt-crisis statistics. Defaults are rare (1.2 percent frequency) and preceded by surging debt and spreads. Debt sells at the risk-free price most of the time, but the government's lack of commitment reduces sustainable debt sharply.

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“…They show how lack of commitment and fiscal policy coordination leads countries to overborrow due to a fiscal externality, focusing on public debt traded across countries by risk-neutral investors, instead of default on risk-averse domestic debt holders. Andreasen et al [7] and Jeon and Kabukcuoglu [33] study models in which domestic income heterogeneity plays a role in the determination of external defaults, and Arellano et.al. [9] and Rojas [49] study sovereign risk in models with heterogeneous firms.…”

Section: Figure 1: Eurozone Debt Ratios and Spreadsmentioning

confidence: 99%

History Remembered: Optimal Sovereign Default on Domestic and External Debt

D’Erasmo

Mendoza

2018

SSRN Journal

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Infrequent but turbulent overt sovereign defaults on domestic creditors are a "forgotten history" in Macroeconomics. We propose a heterogeneous-agents model in which the government chooses optimal debt and default on domestic and foreign creditors by balancing distributional incentives v. the social value of debt for self-insurance, liquidity, and risk-sharing. A rich feedback mechanism links debt issuance, the distribution of debt holdings, the default decision, and risk premia. Calibrated to Eurozone data, the model is consistent with key long-run and debt-crisis statistics. Defaults are rare (1.2 percent frequency), and preceded by surging debt and spreads. Debt sells at the risk-free price most of the time, but the government's lack of commitment reduces sustainable debt sharply.

show abstract

The political economy of sovereign defaults

Cited by 54 publications

References 16 publications

Resolving sovereign debt crises: the role of political risk

Resolving sovereign debt crises: the role of political risk

History Remembered: Optimal Sovereign Default on Domestic and External Debt

History Remembered: Optimal Sovereign Default on Domestic and External Debt

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