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Sovereign risk and secondary markets

Conventional wisdom views the problem of sovereign risk as one of insufficient penalties. Foreign creditors can only be repaid if the government enforces foreign debts. And this will only happen if foreign creditors can effectively use the threat of imposing penalties to the country. Guided by this assessment of the problem, policy prescriptions to reduce sovereign risk have focused on providing incentives for governments to enforce foreign debts. For instance, countries might want to favor increased trade ties and other forms of foreign dependence that make them vulnerable to foreign retaliation thereby increasing the costs of default penalties.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 998.

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Date of creation: Dec 2006
Date of revision: Aug 2009
Handle: RePEc:upf:upfgen:998
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