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Why do governments default, and why don't they default more often?

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  • Buiter, Willem
  • Rahbari, Ebrahim

Abstract

This paper considers the economic and political drivers of sovereign default, focusing on countries rich enough to render sovereign default a ?won?t pay? rather than a ?can?t pay? phenomenon. Unlike many private contracts, sovereign debt contracts rely almost exclusively on self-enforcement rather than on third-party enforcement. Among the social costs of sovereign default are contagion and concentration risk, both within and outside the jurisdiction of the sovereign, and ?rule of law externalities?. We consider illiquidity as a separate trigger for sovereign default and emphasize the role of lenders of last resort for the sovereign. Not only do political economy factors drive sovereign insolvency, they also influence the debt sustainability analyses performed by national and international agencies. We consider it likely that the absence of sovereign defaults in the advanced economies since the (West) German defaults of 1948 and 1953 until the Greek defaults of 2012 was a historical aberration that is unlikely to be a reliable guide to the future.

Suggested Citation

  • Buiter, Willem & Rahbari, Ebrahim, 2013. "Why do governments default, and why don't they default more often?," CEPR Discussion Papers 9492, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9492
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    References listed on IDEAS

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    1. Willem H. Buiter, 2013. "The Role of Central Banks in Financial Stability: How Has It Changed?," World Scientific Book Chapters, in: Douglas D Evanoff & Cornelia Holthausen & George G Kaufman & Manfred Kremer (ed.), The Role of Central Banks in Financial Stability How Has It Changed?, chapter 2, pages 11-56, World Scientific Publishing Co. Pte. Ltd..
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    Citations

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    Cited by:

    1. Blot, Christophe & Ducoudré, Bruno & Timbeau, Xavier, 2016. "Sovereign debt spread and default in a model with self-fulfilling prophecies and asymmetric information," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 281-299.
    2. repec:hal:spmain:info:hdl:2441/1fftm81rkt8t48jjlb9s9fh2g5 is not listed on IDEAS
    3. Lorenzo Esposito & Giuseppe Mastromatteo, 2019. "Defaultnomics: Making Sense of the Barro-Ricardo Equivalence in a Financialized World," Economics Working Paper Archive wp_933, Levy Economics Institute.
    4. Nicholas Crafts, 2016. "Reducing High Public Debt Ratios: Lessons from UK Experience," Fiscal Studies, Institute for Fiscal Studies, vol. 37, pages 201-223, June.
    5. Michel Aglietta & Xavier Ragot, 2015. "Érosion du tissu productif en France. Causes et remèdes," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(6), pages 95-150.
    6. repec:hal:spmain:info:hdl:2441/5bhbhfsmhj981b00go8c6saind is not listed on IDEAS
    7. Pawel Gajewski, 2014. "Monetary policy stress in EMU during the moderation and the global crisis," Lodz Economics Working Papers 2/2014, University of Lodz, Faculty of Economics and Sociology.
    8. Dennis Bonam & Jasper Lukkezen, 2013. "Government Spending Shocks, Sovereign Risk and the Exchange Rate Regime," Tinbergen Institute Discussion Papers 13-212/VI, Tinbergen Institute, revised 09 Jan 2013.
    9. Nicholas Crafts, 2014. "What Does the 1930s' Experience Tell Us about the Future of the Eurozone?," Journal of Common Market Studies, Wiley Blackwell, vol. 52(4), pages 713-727, July.
    10. Dennis Bonam & Jasper Lukkezen, 2013. "Government Spending Shocks, Sovereign Risk and the Exchange Rate Regime," Tinbergen Institute Discussion Papers 13-212/VI, Tinbergen Institute, revised 09 Jan 2013.
    11. Warmedinger, Thomas & Checherita-Westphal, Cristina & Drudi, Francesco & Setzer, Ralph & De Stefani, Roberta & Bouabdallah, Othman & Westphal, Andreas, 2017. "Debt sustainability analysis for euro area sovereigns: a methodological framework," Occasional Paper Series 185, European Central Bank.
    12. Roberto Tamborini & Matteo Tomaselli, 2020. "When does public debt impair economic growth? A literature review in search of a theory," DEM Working Papers 2020/7, Department of Economics and Management.
    13. Brigitte Granville & Dominik Nagly, 2013. "Determinants of relative bargaining power in monetary unions," Working Papers 47, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    14. Pompeo Della Posta & Roberto Tamborini, 2021. "The Existential Trilemma of EMU in a Model of Fiscal Target Zone," EconPol Working Paper 66, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    15. repec:hal:spmain:info:hdl:2441/7n3slb7mj68uoa4brsrd6gb2oa is not listed on IDEAS
    16. Roberto Tamborini, 2015. "Heterogeneous Market Beliefs, Fundamentals and the Sovereign Debt Crisis in the Eurozone," Economica, London School of Economics and Political Science, vol. 82, pages 1153-1176, December.
    17. Huong Dang, 2014. "How dimensions of national culture and institutional characteristics influence sovereign rating migration dynamics," ZenTra Working Papers in Transnational Studies 42 / 2014, ZenTra - Center for Transnational Studies.
    18. van Riet, Ad, 2017. "Addressing the safety trilemma: a safe sovereign asset for the eurozone," ESRB Working Paper Series 35, European Systemic Risk Board.
    19. Giuliana Passamani & Roberto Tamborini & Matteo Tomaselli, 2014. "Sustainability vs. credibility of fiscal consolidation. A Principal Components test for the Euro Zone," DEM Discussion Papers 2014/09, Department of Economics and Management.

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    More about this item

    Keywords

    Fiscal sustainability; Intertemporal budget constraint; Political economy.; Solvency; Sovereign default; Strategic default;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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