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Financial Deregulation, Private Foreign Borrowing and the Risk of Sovereign Default: A Political-Economic Analysis

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  • Oya Celasun, Philipp Harms

    (Dresden University of Technology, Germany)

Abstract

It is often argued that financial liberalization and large external borrowing by the private sector bode ill for sovereign creditworthiness. In this paper, we highlight a channel through which financial liberalization reduces the risk that a developing country’s government defaults on its foreign debt. We present a simple model in which a deregulation-induced surge in private borrowing raises the political costs of default and reduces a government’s incentive to deny repayment

Suggested Citation

  • Oya Celasun, Philipp Harms, 2010. "Financial Deregulation, Private Foreign Borrowing and the Risk of Sovereign Default: A Political-Economic Analysis," Frontiers in Finance and Economics, SKEMA Business School, vol. 7(1), pages 82-100, April.
    • Handle: RePEc:ffe:journl:v:7:y:2010:i:1:p:82-100
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    Keywords

    International Investment; Sovereign Risk.;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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