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Sovereign defaults and liquidity crises

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  • Brutti, Filippo

Abstract

Sovereign debt crises in emerging markets are usually associated with liquidity and banking crises. The conventional view is that the domestic turmoil is the consequence of foreign retaliation, although there is no clear empirical evidence on "classic" default penalties. This paper emphasizes, instead, a direct link between sovereign defaults and liquidity crises building on two natural assumptions: (i) government bonds represent a source of liquidity for the domestic private sector and (ii) the government cannot discriminate between domestic and foreign creditors in the event of default. In this context, external debt emerges even in the absence of classic penalties, and government default is countercyclical, triggers a liquidity crunch, and amplifies output volatility. In addition, a reform that involves a substitution of government bonds with privately-sourced liquidity instruments could backfire by restricting governments' access to foreign credit.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 84 (2011)
Issue (Month): 1 (May)
Pages: 65-72

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Handle: RePEc:eee:inecon:v:84:y:2011:i:1:p:65-72

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Legal institutions Liquidity Sovereign risk Financial dependence;

References

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Citations

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Cited by:
  1. Fernando Broner & Alberto Martin & Jaume Ventura & Aitor Erce, 2014. "Sovereign debt markets in turbulent times: creditor discrimination and crowding-out effects," Banco de Espa�a Working Papers 1402, Banco de Espa�a.
  2. repec:onb:oenbwp:y:2013:i:187:b:1 is not listed on IDEAS
  3. Jin Cheng & Meixing Dai & Frédéric Dufourt, 2014. "Banking and Sovereign Debt Crises in a Monetary Union Without Central Bank Intervention," Working Papers halshs-01009684, HAL.
  4. Stefan Niemann & Paul Pichler, 2013. "Collateral, Liquidity and Debt Sustainability," Working Papers 187, Oesterreichische Nationalbank (Austrian Central Bank).
  5. Gonçalves, Carlos Eduardo & Guimarães, Bernardo, 2012. "Sovereign default risk and commitment for fiscal adjustment," CEPR Discussion Papers 9163, C.E.P.R. Discussion Papers.
  6. Fernando Broner & Aitor Erce & Alberto Martin & Jaume Ventura, 2013. "Sovereign Debt Markets in Turbulent Times: Creditor Discrimination and Crowding-Out," IMF Working Papers 13/270, International Monetary Fund.
  7. Lizarazo, Sandra, 2010. "Default Risk and Risk Averse International Investors," MPRA Paper 20794, University Library of Munich, Germany.
  8. Eric Mengus, 2012. "Foreign Debt and the Ricardian Equivalence," 2012 Meeting Papers 412, Society for Economic Dynamics.
  9. Filippo Brutti & Philip Ulrich Sauré, 2014. "Repatriation of Debt in the Euro Crisis: Evidence for the Secondary Market Theory," Working Papers 2014-03, Swiss National Bank.

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