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Borrowing in Excess of Natural Ability to Repay

Listed author(s):
  • Victor Filipe Martins da Rocha

    ()

    (EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro], CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS - Centre National de la Recherche Scientifique - Université Paris-Dauphine)

  • Yiannis Vailakis

    ()

    (Adam Smith Business School - University of Glasgow)

This paper aims at improving our understanding of self-enforcing debt in competitive dynamic economies without commitment when default induces a permanent loss of access to international credit markets. We show, by means of two examples, that sovereigns can sustain self-enforcing debt levels in excess of their natural ability to repay represented by the present value of future endowments. This is in sharp contrast with the standard results in the full commitment literature and shows that the future resources for repayment and the market value of time (i.e., the interest rates) are not the only relevant aspects of a sovereign’s borrowing capacity. Indeed, we reveal a new channel through which self-enforcing debt is sustained at equilibrium: creditworthiness in international credit markets may reflect the intermediation services of the debtors to alleviate the financial frictions of potential creditors.

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Paper provided by HAL in its series Working Papers with number hal-01249202.

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Date of creation: 19 Nov 2015
Handle: RePEc:hal:wpaper:hal-01249202
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