Sovereign Debt Markets in Turbulent Times: Creditor Discrimination and Crowding-Out
In 2007, countries in the Euro periphery were enjoying stable growth, low deficits, and low spreads. Then the financial crisis erupted and pushed them into deep recessions, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private to the public sectors, reducing investment and deepening the recessions even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the Eurozone, and how they may be addressed by policies at the European level.
|Date of creation:||27 Dec 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (202) 623-7000
Fax: (202) 623-4661
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC
|Order Information:||Web: http://www.imf.org/external/pubs/pubs/ord_info.htm|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mark Aguiar & Manuel Amador & Gita Gopinath, 2007.
"Investment Cycles and Sovereign Debt Overhang,"
NBER Working Papers
13353, National Bureau of Economic Research, Inc.
- Aitor Erce, 2012. "Selective sovereign defaults," Globalization and Monetary Policy Institute Working Paper 127, Federal Reserve Bank of Dallas.
- Timothy Kehoe & Juan Carlos Conesa, 2012.
"Gambling for Redemption and Self-Fulfilling Debt Crises,"
2012 Meeting Papers
614, Society for Economic Dynamics.
- Juan Carlos Conesa & Timothy J. Kehoe, 2012. "Gambling for redemption and self-fulfilling debt crises," Staff Report 465, Federal Reserve Bank of Minneapolis.
- Juan Carlos Conesa & Timothy J. Kehoe, 2015. "Gambling for Redemption and Self-Fulfilling Debt Crises," NBER Working Papers 21026, National Bureau of Economic Research, Inc.
- Harold L. Cole & Timothy J. Kehoe, 1998.
"Self-Fulfilling Debt Crises,"
Levine's Working Paper Archive
114, David K. Levine.
- Brutti, Filippo, 2011. "Sovereign defaults and liquidity crises," Journal of International Economics, Elsevier, vol. 84(1), pages 65-72, May.
- Mark Aguiar & Manuel Amador, 2011.
"Growth in the Shadow of Expropriation,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 126(2), pages 651-697.
- Mark Aguiar & Manuel Amador, 2009. "Growth in the Shadow of Expropriation," NBER Working Papers 15194, National Bureau of Economic Research, Inc.
- Mark Aguiar & Manuel Amador, 2009. "Growth in the Shadow of Expropriation," Discussion Papers 08-051, Stanford Institute for Economic Policy Research.
- Mark Aguiar & Manuel Amador, 2010. "Growth in the Shadow of Expropriation," 2010 Meeting Papers 1194, Society for Economic Dynamics.
- Jaume Ventura & Fernando A. Broner, 2006.
"Globalization and Risk Sharing,"
NBER Working Papers
12482, National Bureau of Economic Research, Inc.
- Fernando Broner & Jaume Ventura, 2005. "Globalization and risk sharing," Economics Working Papers 837, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2009.
- Broner, Fernando A & Ventura, Jaume, 2006. "Globalization and Risk Sharing," CEPR Discussion Papers 5820, C.E.P.R. Discussion Papers.
- Fernando A Broner & Jaume Ventura, 2006. "Globalization and Risk Sharing," Working Papers 307, Barcelona Graduate School of Economics.
- Jochen R. Andritzky, 2012. "Government Bonds and their Investors: What Are the Facts and Do they Matter?," IMF Working Papers 12/158, International Monetary Fund.
- Oren Sussman & Alexander Guembel, 2005. "Sovereign Debt Without Default Penalties," OFRC Working Papers Series 2005fe17, Oxford Financial Research Centre.
- Fernando Broner & Tatiana Didier & Aitor Erce & Sergio L. Schmukler, 2010.
"Gross capital flows: Dynamics and crises,"
Economics Working Papers
1227, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2012.
- Broner, Fernando & Didier, Tatiana & Erce, Aitor & Schmukler, Sergio L., 2011. "Gross capital flows : dynamics and crises," Policy Research Working Paper Series 5768, The World Bank.
- Fernando Broner & Tatiana Didier & Aitor Erce & Sergio L. Schmukler, 2010. "Gross Capital Flows: Dynamics and Crises," Working Papers 476, Barcelona Graduate School of Economics.
- Fernando Broner & Tatiana Didier & Aitor Erce & Sergio L. Schmukler, 2011. "Gross capital flows: dynamics and crises," Banco de Espa�a Working Papers 1039, Banco de Espa�a.
- Broner, Fernando A & Didier, Tatiana & Erce, Aitor & Schmukler, Sergio, 2011. "Gross Capital Flows: Dynamics and Crises," CEPR Discussion Papers 8591, C.E.P.R. Discussion Papers.
- Yan Bai & Jing Zhang, 2009.
"Duration of Sovereign Debt Renegotiation,"
593, Research Seminar in International Economics, University of Michigan.
- Lanau, Sergi, 2011. "The contractual approach to sovereign debt restructuring," Bank of England working papers 409, Bank of England.
- Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
- Silvia Merler & Jean Pisani-Ferry, 2012. "Who's afraid of sovereign bonds?," Policy Contributions 695, Bruegel.
- Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:13/270. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow)or (Hassan Zaidi)
If references are entirely missing, you can add them using this form.