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Intertwined Sovereign and Bank Solvencies in a Model of Self-Fulfilling Crisis

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  • Gustavo Adler

Abstract

Large fiscal financing needs, both in advanced and emerging market economies, have often been met by borrowing heavily from domestic banks. As public debt approached sustainability limits in a number of countries, however, high bank exposure to sovereign risk created a fragile inter-dependence between fiscal and bank solvency. This paper presents a simple model of twin (sovereign and banking) crisis that stresses how this interdependence creates conditions conducive to a self-fulfilling crisis.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/178.

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Length: 29
Date of creation: 01 Jul 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/178

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Keywords: Banking crisis; Banks; Public debt; financial intermediaries; bonds; domestic borrowing; bond; domestic debt; government bonds; financial intermediation; sovereign debt; bond price; private credit; external debt; bond prices; government bond; moral hazard; stock of debt; domestic bonds; financial institutions; government debt; domestic government bonds; financial system; domestic interest rates; external borrowing; sovereign default; financial fragility; financial instability; domestic financial system; long term debt; currency crisis; currency mismatches; external obligations; domestic investors; domestic financing; international bonds; debt crisis; foreign debt; foreign bonds; financial reforms; domestic financial institutions; financial globalization; financial structure; currency crises; crowding out; debt structure; present value; sovereign debt crisis; financial sector; financial market; financial market fragilities;

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  1. Juan Carlos Conesa & Timothy J. Kehoe, 2012. "Gambling for redemption and self-fulfilling debt crises," Staff Report, Federal Reserve Bank of Minneapolis 465, Federal Reserve Bank of Minneapolis.
  2. Enders, Zeno & Kollmann, Robert & Müller, Gernot, 2010. "Global Banking and International Business Cycles," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7972, C.E.P.R. Discussion Papers.
  3. Ueda, Kozo, 2012. "Banking globalization and international business cycles: Cross-border chained credit contracts and financial accelerators," Journal of International Economics, Elsevier, Elsevier, vol. 86(1), pages 1-16.
  4. Gunes Kamber & Christoph Thoenissen, 2011. "Financial intermediation and the internationalbusiness cycle: The case of small countries with big banks," CAMA Working Papers 2011-22, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. Carlos A. Rodríguez, 1992. "Financial Reforms in Latin America: The Cases of Argentina, Chile and Uruguay," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 84, Universidad del CEMA.
  6. Cristina Arellano & Juan Carlos Conesa & Timothy J. Kehoe, 2012. "Chronic sovereign debt crises in the Eurozone, 2010-2012," Economic Policy Paper, Federal Reserve Bank of Minneapolis 12-4, Federal Reserve Bank of Minneapolis.
  7. Steven Riess Weisbrod & Liliana Rojas-Suárez, 1994. "Financial Market Fragilities in Latin America," IMF Working Papers, International Monetary Fund 94/117, International Monetary Fund.
  8. Bennett Sutton & Luis Catão, 2002. "Sovereign Defaults," IMF Working Papers, International Monetary Fund 02/149, International Monetary Fund.
  9. Afonso S. Bevilaqua & Márcio Gomes Pinto Garcia, 1999. "Banks, domestic debt intermediation and confidence crises: the recent Brazilian experience," Textos para discussão, Department of Economics PUC-Rio (Brazil) 407, Department of Economics PUC-Rio (Brazil).
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Cited by:
  1. Lawson, Cornelia & Soós,Sándor, 2014. "A Thematic Mobility Measure for Econometric Analysis," Department of Economics and Statistics Cognetti de Martiis. Working Papers, University of Turin 201408, University of Turin.
  2. Serkan Arslanalp & Takahiro Tsuda, 2012. "Tracking Global Demand for Advanced Economy Sovereign Debt," IMF Working Papers, International Monetary Fund 12/284, International Monetary Fund.
  3. Sau, Lino, 2014. "Debt Deflation Worries: a Restatement," CESMEP Working Papers, University of Turin 201402, University of Turin.

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