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Public Debt Sustainability and Defaults

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  • Michel Guillard
  • Hubert Kempf

Abstract

We offer a new methodology for the assessment of public debt sustainability in a stochastic economy when sovereign default taken into account. The default threshold differs from the no-Ponzi condition and depends on the post-default debt recovery rule. We distinguish sustainability and unsustainability conditions, related to alternative scenarios on the future sequence of shocks. We highlight the role of the debt recovery ratio on the whole dynamics of public debt. When a sovereign default occurs, the sustainability of the post-default debt is ensured when the haircut is sufficiently large. Lastly we provide an explanation of serial defaults.

Suggested Citation

  • Michel Guillard & Hubert Kempf, 2017. "Public Debt Sustainability and Defaults," CESifo Working Paper Series 6554, CESifo.
    • Handle: RePEc:ces:ceswps:_6554
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    Cited by:

    1. Ibrahima Diarra & Michel Guillard & Hubert Kempf, 2022. "Sovereign Defaults and Debt Sustainability: The Debt Recovery Channel," CESifo Working Paper Series 9688, CESifo.

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    Keywords

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    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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