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Sovereign debt crises and cross-country assistance

Author

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  • Christian Grisse
  • Gisle J. Natvik

Abstract

We provide a theoretical study of the interplay between cross-country assistance and expectations-driven sovereign debt crises. A self-interested "safe" country may choose to assist a "risky" country that is prone to default. Investors internalize the potential for assistance when lending to fragile countries. If the safe country is not able to commit to or rule out cross-country transfers, assistance only improves the equilibrium outcomes if the risky country is fundamentally insolvent and cannot handle its debt even at the risk-free interest rate. If a default requires pessimistic expectations, an incentive-compatible assistance policy has adverse side effects.

Suggested Citation

  • Christian Grisse & Gisle J. Natvik, 2018. "Sovereign debt crises and cross-country assistance," Working Papers 2018-15, Swiss National Bank.
  • Handle: RePEc:snb:snbwpa:2018-15
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Sovereign default; self-fulfilling expectations; bailout;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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