IDEAS home Printed from https://ideas.repec.org/p/sbs/wpsefe/2005fe17.html
   My bibliography  Save this paper

Sovereign Debt Without Default Penalties

Author

Listed:
  • Oren Sussman
  • Alexander Guembel

Abstract

The basic question regarding sovereign debt is why sovereign borrowers ever repay, provided that creditors have no power to foreclose on any of their assets. In this paper we suggest an answer: sovereign debt will be served as long as the median voter is a net loser from default. Default generates a reallocation of wealth from locals to foreigners, but also from local debtholders to local tax payers. Sovereign debt is stable as long as the median voter’s interests are more aligned with the foreign lenders than with the local taxpayers. We further augment the model with elements of market microstructure theory to address the question how markets rationally use capital flows so as to infer the stability of debt structure. We show that foreign demand shocks can destabilise debt even though they are not fundamental. We also show that more volatile foreign demand reduces a country’s debt capacity. Our work thus integrates elements of market microstructure theory into politicaleconomy modeling.

Suggested Citation

  • Oren Sussman & Alexander Guembel, 2005. "Sovereign Debt Without Default Penalties," OFRC Working Papers Series 2005fe17, Oxford Financial Research Centre.
  • Handle: RePEc:sbs:wpsefe:2005fe17
    as

    Download full text from publisher

    File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/2005fe17.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sbs:wpsefe:2005fe17. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Maxine Collett (email available below). General contact details of provider: https://edirc.repec.org/data/frcoxuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.