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Sovereign Defaults and Debt Sustainability: A Joint Analysis

Author

Listed:
  • Ibrahima Diarra

    (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay)

  • Michel Guillard

    (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay)

  • Hubert Kempf

    (ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

We build a stochastic model of excusable sovereign default which incorporates a simple debt recovery rule. It depends on a single parameter that allows for partial debt recovery. We show that the maximum debt-to-GDP ratio that a country can sustain without defaulting is increasing, nonlinear, and sensitive to the debt-recovery parameter. We study the dynamics of public debt when the default premium is taken into account and offer new definitions of public debt unsustainability. A higher debt recovery parameter increases the fiscal space but worsens the financial position of a borrowing country after a default episode. We show that the estimated debt-recovery parameter is lower for emerging countries than for developed countries.

Suggested Citation

  • Ibrahima Diarra & Michel Guillard & Hubert Kempf, 2025. "Sovereign Defaults and Debt Sustainability: A Joint Analysis," Sciences Po Economics Publications (main) hal-05514894, HAL.
    • Handle: RePEc:hal:spmain:hal-05514894
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-05514894v1
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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