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Sovereign debt, volatility, and insurance

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  • Kenneth M. Kletzer

Abstract

External debt increases the vulnerability of indebted emerging market economies to macroeconomic volatility and financial crises. Capital account reversals often lead sovereign debt repayment crises that are only resolved after prolonged and difficult debt restructuring. Foreign indebtedness exacerbates domestic financial distress in crisis, increasing both the incidence and severity of emerging market crises. These outcomes contrast with the presumption that access to international capital markets should help countries to smooth domestic consumption and investment against macroeconomic shocks. This paper uses models of sovereign to reconsider the role of sovereign debt renegotiation for international risk sharing and presents an approach for analyzing contractual innovations for implementing contingent debt repayments. The financial innovations that might allow risk-sharing rather than risk-inducing capital flows go beyond contractual changes that ease debt renegotiation by separating contingent payments from bonds.

Suggested Citation

  • Kenneth M. Kletzer, 2005. "Sovereign debt, volatility, and insurance," Working Paper Series 2006-05, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2006-05
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    Cited by:

    1. Kletzer, Kenneth, 2005. "International Financial Integration, Sovereignty, and Constraints on Macroeconomic Policies," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, pages 165-186.

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    Keywords

    Debts; External ; Financial crises ; Insurance;

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