This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Sovereign Debt Without Default Penalties

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Oren Sussman
Alexander Guembel
Abstract

The basic question regarding sovereign debt is why sovereign borrowers ever repay, provided that creditors have no power to foreclose on any of their assets. In this paper we suggest an answer: sovereign debt will be served as long as the median voter is a net loser from default. Default generates a reallocation of wealth from locals to foreigners, but also from local debtholders to local tax payers. Sovereign debt is stable as long as the median voter’s interests are more aligned with the foreign lenders than with the local taxpayers. We further augment the model with elements of market microstructure theory to address the question how markets rationally use capital flows so as to infer the stability of debt structure. We show that foreign demand shocks can destabilise debt even though they are not fundamental. We also show that more volatile foreign demand reduces a country’s debt capacity. Our work thus integrates elements of market microstructure theory into politicaleconomy modeling.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. 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.

File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/2005fe17.pdf
Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Maxine Collett)
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2005fe17.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: 2005
Date of revision:
Handle: RePEc:sbs:wpsefe:2005fe17

Contact details of provider:
Email:
Web page: http://www.finance.ox.ac.uk
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Maxine Collett).

Related research
Keywords:

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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.:
  1. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Blackwell Publishing, vol. 48(2), pages 289-309, April. [Downloadable!] (restricted)
  2. Andrei Shleifer, 2003. "Will The Sovereign Debt Market Survive?," Harvard Institute of Economic Research Working Papers 2000, Harvard - Institute of Economic Research. [Downloadable!]
    Other versions:
  3. Rose, Andrew K, 2002. "One Reason Countries Pay Their Debts: Renegotiation and International Trade," CEPR Discussion Papers 3157, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Bolton, Patrick & Jeanne, Olivier, 2005. "Structuring and Restructuring Sovereign Debt: The Role of Seniority," CEPR Discussion Papers 4901, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February. [Downloadable!] (restricted)
    Other versions:
  6. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
  7. Patrick Bolton & Xavier Freixas, 2000. "Equity, Bonds, and Bank Debt: Capital Structure and Financial Market Equilibrium under Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 324-351, April. [Downloadable!] (restricted)
  8. Bulow, Jeremy & Rogoff, Kenneth, 1989. "Sovereign Debt: Is to Forgive to Forget?," American Economic Review, American Economic Association, vol. 79(1), pages 43-50, March. [Downloadable!] (restricted)
    Other versions:
  9. Robert Gertner & David Scharfstein, 1991. "A Theory of Workouts and the Effects of Reorganization Law," NBER Technical Working Papers 0103, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  11. Guido M. Sandleris, 2005. "Sovereign Defaults: Information, Investment and Credit," 2005 Meeting Papers 21, Society for Economic Dynamics. [Downloadable!]
    Other versions:
  12. Dixit, Avinash & Londregan, John, 2000. "Political Power and the Credibility of Government Debt," Journal of Economic Theory, Elsevier, vol. 94(1), pages 80-105, September. [Downloadable!] (restricted)
  13. Michael Kremer & Paras Mehta, 2000. "Globalization and International Public Finance," NBER Working Papers 7575, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Enrica Detragiache & Antonio Spilimbergo, 2001. "Crises and Liquidity - Evidence and Interpretation," IMF Working Papers 01/2, International Monetary Fund. [Downloadable!]
Full references

Statistics
Access and download statistics

Did you know? You too can volunteer for RePEc, for example by encouraging others to use our services.

This page was last updated on 2009-12-5.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.