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Sovereign Defaults, Credit to the Private Sector, and Domestic Credit Market Institutions

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  • GUIDO SANDLERIS

Abstract

Sovereign defaults are associated with declines in foreign and domestic credit to the domestic private sector. This paper analyzes theoretically whether sovereign defaults can lead to this decline, even if domestic agents do not hold sovereign debt. It also studies whether the quality of domestic financial institutions affect the magnitude of this effect. In order to address these issues, the paper embeds the traditional sovereign borrower/foreign creditors relationship of the sovereign debt literature in a macromodel where widespread individual financial constraints limit a country's ability to reallocate resources. The paper finds that sovereign defaults can indeed generate a decline in foreign and domestic credit even if domestic agents do not hold sovereign debt, and that stronger domestic financial institutions can amplify this effect. These findings constitute a new step toward understanding the costs of sovereign defaults.

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  • Guido Sandleris, 2014. "Sovereign Defaults, Credit to the Private Sector, and Domestic Credit Market Institutions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(2-3), pages 321-345, March.
  • Handle: RePEc:wly:jmoncb:v:46:y:2014:i:2-3:p:321-345
    DOI: 10.1111/jmcb.12108
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    References listed on IDEAS

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    Cited by:

    1. Anil Ari, 2015. "Sovereign Risk and Bank Risk-Taking," Working Papers 202, Oesterreichische Nationalbank (Austrian Central Bank).
    2. Engler, Philipp & Große Steffen, Christoph, 2016. "Sovereign risk, interbank freezes, and aggregate fluctuations," European Economic Review, Elsevier, vol. 87(C), pages 34-61.
    3. Kaas, Leo & Mellert, Jan & Scholl, Almuth, 2020. "Sovereign and private default risks over the business cycle," Journal of International Economics, Elsevier, vol. 123(C).
    4. Fratianni, Michele & Marchionne, Francesco, 2017. "Bank asset reallocation and sovereign debt," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 15-32.
    5. Andreasen, Eugenia, 2015. "Sovereign default, enforcement and the private cost of capital," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 411-427.
    6. Paczos, Wojtek & Shakhnov, Kirill, 2022. "Defaulting on Covid debt," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    7. Mehdi Mili, 2018. "Systemic risk spillovers in sovereign credit default swaps in Europe: a spatial approach," Journal of Asset Management, Palgrave Macmillan, vol. 19(2), pages 133-143, March.
    8. Guido Sandleris, 2016. "The Costs of Sovereign Default: Theory and Empirical Evidence," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 1-27, April.
    9. Konstantin Egorov & Michal Fabinger, 2016. "Reputational Effects in Sovereign Default," CIRJE F-Series CIRJE-F-999, CIRJE, Faculty of Economics, University of Tokyo.
    10. Michele Fratianni & Francesco Marchionne, 2015. "De-leveraging, de-risking and moral suasion in the banking sector," Mo.Fi.R. Working Papers 103, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    11. Kant, Chander, 2018. "Financial openness & institutions in developing countries," Research in International Business and Finance, Elsevier, vol. 46(C), pages 240-250.
    12. Sandro C. Andrade & Vidhi Chhaochharia, 2018. "The Costs of Sovereign Default: Evidence from the Stock Market," Review of Financial Studies, Society for Financial Studies, vol. 31(5), pages 1707-1751.
    13. Kizys, Renatas & Paltalidis, Nikos & Vergos, Konstantinos, 2016. "The quest for banking stability in the euro area: The role of government interventions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 111-133.

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