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Sovereign debt, volatility, and insurance

  • Kenneth M. Kletzer

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.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2006-05.

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Date of creation: 2005
Date of revision:
Handle: RePEc:fip:fedfwp:2006-05
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  10. Kenneth Kletzer, 2003. "Sovereign Bond Restructuring: Collective Action Clauses and official Crisis Intervention," IMF Working Papers 03/134, International Monetary Fund.
  11. Narayana Kocherlakota, 2010. "Implications of Efficient Risk Sharing Without Commitment," Levine's Working Paper Archive 2053, David K. Levine.
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  13. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. VĂ©gh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  14. Kletzer, K.M. & Newbery, D.M., 1991. "Smoothing Primary Exporters' Price Risks: Bonds, Futures, Options and Insurance," Papers 647, Yale - Economic Growth Center.
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  17. Herschel I. Grossman & John B. Van Huyck, 1985. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," NBER Working Papers 1673, National Bureau of Economic Research, Inc.
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