The Dynamics of Sovereign Debt Crises and Bailouts

Francisco Roch and Harald Uhlig ()

No 2016/136, IMF Working Papers from International Monetary Fund

Abstract: Motivated by the recent European debt crisis, this paper investigates the scope for a bailout guarantee in a sovereign debt crisis. Defaults may arise from negative income shocks, government impatience or a "sunspot"-coordinated buyers strike. We introduce a bailout agency, and characterize the minimal actuarially fair intervention that guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing. The intervention makes it cheaper for governments to borrow, inducing them borrow more, leaving default probabilities possibly rather unchanged. The maximal backstop will be pulled precisely when fundamentals worsen.

Keywords: WP; secondary market; debt crisis; debt level; government debt; Default; Bailouts; Self-fulfilling Crises; Endogenous Borrowing Constraints; Long-term Debt; OMT; Eurozone Debt Crisis; purchase guarantee; gdp ratio; debt purchase; purchase assistance; debt price; government default; Debt default; Securities markets; Income (search for similar items in EconPapers)
Pages: 46
Date: 2016-07-11
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Citations: View citations in EconPapers (72)

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Related works:
Journal Article: The dynamics of sovereign debt crises and bailouts (2018)
Working Paper: The Dynamics of Sovereign Debt Crises and Bailouts (2018)
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