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Sovereign Debt without Default Penalties

Author

Listed:
  • Alexander Guembel

    (Finance - CRM - Centre de Recherche en Management - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - IAE - Institut d'Administration des Entreprises - Toulouse - CNRS - Centre National de la Recherche Scientifique)

  • Oren Sussman

Abstract

We develop a theory of sovereign borrowing where default penalties are not implementable. We show that when debt is held by both domestic and foreign agents, the median voter might have an interest in serving it. Our theory has important practical implications regarding (a) the role of financial intermediaries in sovereign lending, (b) the effect of capital flows on price volatility including the possible overvaluation of debt to the point that the median voter is priced out of the market, and (c) debt restructuring where creditors are highly dispersed

Suggested Citation

  • Alexander Guembel & Oren Sussman, 2009. "Sovereign Debt without Default Penalties," Post-Print halshs-00492531, HAL.
    • Handle: RePEc:hal:journl:halshs-00492531
    DOI: 10.1111/j.1467-937X.2009.00542.x
    as

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