Sovereign debt: a matter of willingness, not ability, to pay
Greece, which shook international markets with the disclosure of its deep indebtedness, has struggled recently to borrow money. Among European governments, Ireland, Italy, Portugal and Spain have also had difficulty selling bonds. Even though these governments probably have assets that exceed their debts, investors worry about the risk of default. This belief stems in part from the nature of sovereign debt. Governments aren't subject to formal bankruptcy regulations, leaving investors few legal rights over borrower assets, even if they could be liquidated. Consequently, the likelihood of default is not strictly determined by measures of solvency or asset liquidity. Rather, it's a matter of the political willingness to repay creditors. A perceived high likelihood of default increases interest rates on the new debt necessary to finance deficits and payments on outstanding obligations. ; What is an effective response to such debt crises? European policymakers have announced various aid measures--for example, loans at below-market interest rates--for Greece and other troubled governments. With high debts and deficits, these governments must continue borrowing to fund expenses and make debt payments; wide interest rate spreads make that difficult. Policies such as subsidized loans make governments feel richer and thus more willing to pay debt service than face the costs of default. More generally, policy measures aimed at preventing sovereign default ultimately need to raise incentives to repay debt, either by making the payment of debt less costly or by raising default costs.
Volume (Year): 5 (2010)
Issue (Month): sep ()
|Contact details of provider:|| Web page: http://www.dallasfed.org/Email: |
More information through EDIRC
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:fip:feddel:y:2010:i:sep:n:v.5no.9. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Chapman)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.