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Sovereign Risk and Secondary Markets Author info | Abstract | Publisher info | Download info | Related research | Statistics Fernando Broner
Alberto Martin
Jaume Ventura
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Conventional wisdom says that, in the absence of sufficient default penalties, sovereign risk constrains credit and lowers welfare. We show that this conventional wisdom rests on one implicit assumption: that assets cannot be retraded in secondary markets. Once this assumption is relaxed, there is always an equilibrium in which sovereign risk is stripped of its conventional effects. In such an equilibrium, foreigners hold domestic debts and resell them to domestic residents before enforcement. In the presence of (even arbitrarily small) default penalties, this equilibrium is shown to be unique. As a result, sovereign risk neither constrains welfare nor lowers credit. At most, it creates some additional trade in secondary markets. The results presented here suggest a change in perspective regarding the origins of sovereign risk and its remedies. To argue that sovereign risk constrains credit, one must show both the insufficiency of default penalties and the imperfect workings of secondary markets. To relax credit constraints created by sovereign risk, one can either increase default penalties or improve the workings of secondary markets.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
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Date of creation: Dec 2006Date of revision:
Handle: RePEc:nbr:nberwo:12783Note: IFMContact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A. Phone: 617-868-3900 Email: Web page: http://www.nber.org More information through EDIRC
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Paper Broner, Fernando A & Martin, Alberto & Ventura, Jaume, 2007.
"Sovereign Risk and Secondary Markets ,"
CEPR Discussion Papers
6055, C.E.P.R. Discussion Papers.
[Downloadable!] (restricted) Fernando Broner & Alberto Martin & Jaume Ventura, 2006.
"Sovereign Risk and Secondary Markets ,"
Economics Working Papers
998, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2009.
[Downloadable!] Fernando Broner & Alberto Martin & Jaume Ventura, 2006.
"Sovereign Risk and Secondary Markets ,"
2006 Meeting Papers
565, Society for Economic Dynamics.
Find related papers by JEL classification: F34 - International Economics - - International Finance - - - International Lending and Debt Problems F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports :
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references Cited by : (explanations , Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile , click on "citations" and make appropriate adjustments.)
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Broner, Fernando A & Martin, Alberto & Ventura, Jaume, 2007.
"Enforcement Problems and Secondary Markets ,"
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