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Sovereign Debt without Default Penalties

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  • Alexander Guembel
  • Oren Sussman

Abstract

We develop a theory of sovereign borrowing where default penalties are not implementable. We show that when debt is held by both domestic and foreign agents, the median voter might have an interest in serving it. Our theory has important practical implications regarding (a) the role of financial intermediaries in sovereign lending, (b) the effect of capital flows on price volatility including the possible overvaluation of debt to the point that the median voter is priced out of the market, and (c) debt restructuring where creditors are highly dispersed. Copyright 2009, Wiley-Blackwell.

Suggested Citation

  • Alexander Guembel & Oren Sussman, 2009. "Sovereign Debt without Default Penalties," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(4), pages 1297-1320.
    • Handle: RePEc:oup:restud:v:76:y:2009:i:4:p:1297-1320
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    File URL: http://hdl.handle.net/10.1111/j.1467-937X.2009.00542.x
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