Pooling sovereign risks: The case of environmental treaties and international debt
A model is analysed in which a sovereign country has independent obligations to repay a creditor bank and to keep an environmental treaty. It is shown that the linkage of both obligations through a cross-default contract may reduce the sovereign risk attached to both the debt and the environmental contracts. Moreover, such a linkage will create an incentive for the sovereign and the bank to engage in a debt-for-natureswap, the anticipation of which increases the initial incentive for a cross-default contract to be entered into.
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