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Credibility For Sale

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Abstract

We develop a sovereign debt model with official and private creditors where default risk depends on both the level and the composition of liabilities. Higher exposure to official lenders improves incentives to repay but carries extra costs, such as reduced ex-post flexibility. The model implies that official lending to sovereigns takes place in times of debt distress; carries a favorable rate; and can displace private funding even under pari passu provisions. Moreover, in the presence of long-term debt overhang, the availability of official funds increases the probability of default on existing debt, although default does not trigger exclusion from private credit markets. These findings help shed light on joint default and debt composition choices of the type observed during the recent sovereign debt crisis in Europe.

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  • Harris Dellas & Dirk Niepelt, 2013. "Credibility For Sale," Working Papers 13.05, Swiss National Bank, Study Center Gerzensee.
    • Handle: RePEc:szg:worpap:1305
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    Cited by:

    1. Gibson, Heather D. & Hall, Stephen G. & Tavlas, George S., 2016. "The effectiveness of the ECB's asset purchase programs of 2009 to 2012," Journal of Macroeconomics, Elsevier, vol. 47(PA), pages 45-57.
    2. Hatchondo, Juan Carlos & Martinez, Leonardo & Onder, Yasin Kursat, 2017. "Non-defaultable debt and sovereign risk," Journal of International Economics, Elsevier, vol. 105(C), pages 217-229.
    3. Harris Dellas & Dirk Niepelt, 2016. "Sovereign Debt with Heterogeneous Creditors," NBER Chapters, in: NBER International Seminar on Macroeconomics 2015, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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