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Why does sovereign risk differ for domestic and external debt? Evidence from Scandinavia, 1938-1948

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  • Waldenström, Daniel

Abstract

This study shows empirically that the political costs of sovereign default can differ considerably for domestic and external debt. The analysis uses new evidence from Danish and Swedish bond markets around World War II, a time when markets went from being fully integrated to fully segmented overnight. By linking the exogenous wartime shocks to changes in default costs on domestic and external debt, it is found that these costs explain a significant part of the variation in the sovereign yield spread across markets. The results suggest that governments can choose strategically on which debt, the domestic or the external, to default on, and that this decision hinges on the relative size of the political default costs.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 3 (April)
Pages: 387-402

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:3:p:387-402

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Sovereign risk Domestic debt External debt Market segmentation Cliometrics;

References

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  1. Debora Di Gioacchino & Sergio Ginebri & Laura Sabani, 2005. "Public debt repudiation in a monetary union: the role of the geographical allocation of domestic debt," Working Papers 81, University of Rome La Sapienza, Department of Public Economics.
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Citations

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Cited by:
  1. Rohan Pitchford & Mark L. J. Wright, 2013. "On the contribution of game theory to the study of sovereign debt and default," Oxford Review of Economic Policy, Oxford University Press, vol. 29(4), pages 649-667, WINTER.
  2. Michael Tomz & Mark L. J. Wright, 2012. "Empirical research on sovereign debt and default," Working Paper Series WP-2012-06, Federal Reserve Bank of Chicago.
  3. Jean-Pascal Bassino & Thomas Lagoarde-Segot, 2013. "Trading patterns at the Tokyo Stock Exchange, 1931-1940," CEH Discussion Papers 012, Centre for Economic History, Research School of Economics, Australian National University.
  4. Wang, Alan T. & Yang, Sheng-Yung & Yang, Nien-Tzu, 2013. "Information transmission between sovereign debt CDS and other financial factors – The case of Latin America," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 586-601.

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