Sovereign debt: a matter of willingness, not ability, to pay
AbstractGreece, which shook international markets with the disclosure of its deep indebtedness, has struggled recently to borrow money. Among European governments, Ireland, Italy, Portugal and Spain have also had difficulty selling bonds. Even though these governments probably have assets that exceed their debts, investors worry about the risk of default. This belief stems in part from the nature of sovereign debt. Governments aren't subject to formal bankruptcy regulations, leaving investors few legal rights over borrower assets, even if they could be liquidated. Consequently, the likelihood of default is not strictly determined by measures of solvency or asset liquidity. Rather, it's a matter of the political willingness to repay creditors. A perceived high likelihood of default increases interest rates on the new debt necessary to finance deficits and payments on outstanding obligations. ; What is an effective response to such debt crises? European policymakers have announced various aid measures--for example, loans at below-market interest rates--for Greece and other troubled governments. With high debts and deficits, these governments must continue borrowing to fund expenses and make debt payments; wide interest rate spreads make that difficult. Policies such as subsidized loans make governments feel richer and thus more willing to pay debt service than face the costs of default. More generally, policy measures aimed at preventing sovereign default ultimately need to raise incentives to repay debt, either by making the payment of debt less costly or by raising default costs.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Federal Reserve Bank of Dallas in its journal Economic Letter.
Volume (Year): 5 (2010)
Issue (Month): sep ()
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Delia Rodriguez).
If references are entirely missing, you can add them using this form.