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The Dynamics of Sovereign Debt Crises and Bailouts

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  • Mr. Francisco Roch
  • Harald Uhlig

Abstract

Motivated by the recent European debt crisis, this paper investigates the scope for a bailout guarantee in a sovereign debt crisis. Defaults may arise from negative income shocks, government impatience or a "sunspot"-coordinated buyers strike. We introduce a bailout agency, and characterize the minimal actuarially fair intervention that guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing. The intervention makes it cheaper for governments to borrow, inducing them borrow more, leaving default probabilities possibly rather unchanged. The maximal backstop will be pulled precisely when fundamentals worsen.

Suggested Citation

  • Mr. Francisco Roch & Harald Uhlig, 2016. "The Dynamics of Sovereign Debt Crises and Bailouts," IMF Working Papers 2016/136, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2016/136
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    More about this item

    Keywords

    WP; secondary market; debt crisis; debt level; government debt; Default; Bailouts; Self-fulfilling Crises; Endogenous Borrowing Constraints; Long-term Debt; OMT; Eurozone Debt Crisis; purchase guarantee; gdp ratio; debt purchase; purchase assistance; debt price; government default; Debt default; Securities markets; Income;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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