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Sovereign debt, volatility, and insurance

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  • Kenneth M. Kletzer

Abstract

External debt increases the vulnerability of indebted emerging market economies to macroeconomic volatility and financial crises. Capital account reversals often lead sovereign debt repayment crises that are only resolved after prolonged and difficult debt restructuring. Foreign indebtedness exacerbates domestic financial distress in crisis, increasing both the incidence and severity of emerging market crises. These outcomes contrast with the presumption that access to international capital markets should help countries to smooth domestic consumption and investment against macroeconomic shocks. This paper uses models of sovereign to reconsider the role of sovereign debt renegotiation for international risk sharing and presents an approach for analyzing contractual innovations for implementing contingent debt repayments. The financial innovations that might allow risk-sharing rather than risk-inducing capital flows go beyond contractual changes that ease debt renegotiation by separating contingent payments from bonds.

Suggested Citation

  • Kenneth M. Kletzer, 2005. "Sovereign debt, volatility, and insurance," Working Paper Series 2006-05, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2006-05
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    Cited by:

    1. Dias, Daniel A. & Richmond, Christine & Wright, Mark L.J., 2014. "The stock of external sovereign debt: Can we take the data at ‘face value’?," Journal of International Economics, Elsevier, vol. 94(1), pages 1-17.
    2. Kletzer, Kenneth, 2005. "International Financial Integration, Sovereignty, and Constraints on Macroeconomic Policies," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 23(S1), pages 165-186, October.
    3. Kletzer, Kenneth, 2005. "Aid and Sanctions," Santa Cruz Department of Economics, Working Paper Series qt5hq5d9gp, Department of Economics, UC Santa Cruz.
    4. Kenneth Kletzer, 2006. "International Financial Integration, Sovereignty, and Constraints on Macroeconomic Policies," IMF Working Papers 2006/079, International Monetary Fund.
    5. Prince Eyi-Mensah, 2016. "Does Conditionality on Borrowing Help?," International Business Research, Canadian Center of Science and Education, vol. 9(7), pages 12-23, July.
    6. Mark Wright & Christine Richmond & Daniel Dias, 2012. "On The Stock of External Sovereign Debt," 2012 Meeting Papers 490, Society for Economic Dynamics.

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    Keywords

    Debts; External; Financial crises; Insurance;
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