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Secondary markets in turbulent times: distortions, disruptions and bailouts


  • Fernando Broner

    (CREI and Universitat Pompeu Fabra)

  • Aitor Erce

    (Bank of Spain)

  • Alberto Martin

    (CREI and Universitat Pompeu Fabra)

  • Jaume Ventura

    (CREI and Universitat Pompeu Fabra)


Countries in the Euro periphery have gone from zero sovereign spreads and healthy economic growth in 2006 to sovereign debt problems and deep recessions by 2010. This has been accompanied by a transfer of sovereign debts from foreigners to domestic residents and a shift in domestic portfolios from credit to firms and consumers to credit to the public sector. In this paper, we propose a growth model with sovereign debts in the presence of secondary markets that accounts for these observations. The model displays self-fulfilling rollover crises: if foreigners start worrying about default they sell sovereign debts to domestic residents; this crowds out investment and lowers growth; this reduces the cost of default and increases its probability, validating foreigners' fears. The maturity structure of sovereign debts is irrelevant, as secondary markets allow the reallocation of both maturing and non-maturing debts. In other words, secondary markets make long-term debts effectively short-term with regards to the existence of rollover crises.

Suggested Citation

  • Fernando Broner & Aitor Erce & Alberto Martin & Jaume Ventura, 2013. "Secondary markets in turbulent times: distortions, disruptions and bailouts," 2013 Meeting Papers 260, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:260

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    Cited by:

    1. repec:pal:imfecr:v:65:y:2017:i:4:d:10.1057_s41308-016-0027-8 is not listed on IDEAS
    2. Luis Catão & Ana Fostel & Romain Ranciere, 2017. "Fiscal Discoveries and Yield Decouplings," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(4), pages 704-744, November.

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