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The dynamics of sovereign debt crises and bailouts

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  • Roch, Francisco
  • Uhlig, Harald

Abstract

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. We introduce a bailout agency, and characterize the strategy with the minimal actuarially fair intervention which guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing. The intervention makes it cheaper for governments to borrow, inducing them borrow more, leaving default probabilities possibly rather unchanged. The maximal backstop will be pulled precisely when fundamentals worsen.

Suggested Citation

  • Roch, Francisco & Uhlig, Harald, 2018. "The dynamics of sovereign debt crises and bailouts," Journal of International Economics, Elsevier, vol. 114(C), pages 1-13.
  • Handle: RePEc:eee:inecon:v:114:y:2018:i:c:p:1-13
    DOI: 10.1016/j.jinteco.2018.05.002
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    More about this item

    Keywords

    Default; Bailouts; Self-fulfilling crises; Endogenous borrowing constraints; Long-term debt; OMT; Eurozone debt crisis;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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