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Sovereign default, enforcement and the private cost of capital

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  • Andreasen, Eugenia

Abstract

This paper develops a signaling model for a small open economy in which the government's sovereign debt repayment decision gives lenders new information regarding the state's capacity to enforce contracts. Contract enforcement affects the expected repayment of private loans. Therefore, if lenders receive negative information from the sovereign default about the state's capacity to enforce contracts, they worsen the financial conditions offered to local firms, triggering a sharp reduction in credit and investment. The key contribution of this paper is to rationalize the worsened private-sector financial conditions observed after default episodes by modeling the price effect of the informational channel.

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  • Andreasen, Eugenia, 2015. "Sovereign default, enforcement and the private cost of capital," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 411-427.
    • Handle: RePEc:eee:reveco:v:39:y:2015:i:c:p:411-427
    DOI: 10.1016/j.iref.2015.07.008
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    3. Andreasen, Eugenia & Sandleris, Guido & Van der Ghote, Alejandro, 2019. "The political economy of sovereign defaults," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 23-36.

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    More about this item

    Keywords

    Sovereign debt; Sovereign default; Reputation; Signaling; Interest rate; State capacity;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F30 - International Economics - - International Finance - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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