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Credit Derivatives and Sovereign Debt Crises

Author

Listed:
  • Goderis, Benedikt
  • Wagner, Wolf

Abstract

Credit derivatives allow for buying protection on corporate debt, but also on sovereign debt. In this paper we examine the implications for sovereign debt crises. We show that the availability of credit protection lowers ex-ante debtor moral hazard by allowing a bondholder to improve his bargaining position in negotiations with the sovereign, thus forcing the sovereign to internalize more of the costs of a crisis. When bondholders use credit protection strategically, we additionally find that credit derivatives do not hinder an efficient resolution of crises. Crisis resolution may even be improved by facilitating conditionality. When protection is not chosen strategically, however, credit protection may also be detrimental to crisis resolution by making restructuring more difficult. In either case we identify a role for government policy as bondholders' choice of protection is not necessarily socially efficient.

Suggested Citation

  • Goderis, Benedikt & Wagner, Wolf, 2009. "Credit Derivatives and Sovereign Debt Crises," MPRA Paper 17314, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:17314
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    File URL: https://mpra.ub.uni-muenchen.de/17314/1/MPRA_paper_17314.pdf
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    References listed on IDEAS

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    5. Arping, Stefan, 2014. "Credit protection and lending relationships," Journal of Financial Stability, Elsevier, vol. 10(C), pages 7-19.
    6. Weinschelbaum, Federico & Wynne, Jose, 2005. "Renegotiation, collective action clauses and sovereign debt markets," Journal of International Economics, Elsevier, vol. 67(1), pages 47-72, September.
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    Citations

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    Cited by:

    1. Patrick Augustin, 2012. "Sovereign Credit Default Swap Premia," Working Papers 12-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. Marc Chesney & Delia Coculescu & Selim Gökay, 2016. "Endogenous trading in credit default swaps," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 39(1), pages 1-31, April.
    3. Arping, Stefan, 2014. "Credit protection and lending relationships," Journal of Financial Stability, Elsevier, vol. 10(C), pages 7-19.
    4. Hallak, Issam, 2009. "Renegotiation and the pricing structure of sovereign bank loans: Empirical evidence," Journal of Financial Stability, Elsevier, vol. 5(1), pages 89-103, January.
    5. Wagner, Wolf & Marsh, Ian W., 2006. "Credit risk transfer and financial sector stability," Journal of Financial Stability, Elsevier, vol. 2(2), pages 173-193, June.

    More about this item

    Keywords

    credit derivatives; sovereign debt crisis; moral hazard;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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