Sovereign Finance →

Undisclosed Debt Sustainability

Presenting a scenario in which non-Paris Club lending and borrowing is fully disclosed, this study illustrates that transparency has potential effects of decreased debt sustainability for investors such as China, and significant welfare gains for recipient countries. Effects are particularly strong if the debt is large.

Debt Redemption and Reserve Accumulation

This study examines how reserve accumulation affects governments’ decisions to default. The analysis assumes that countries can accumulate reserves and borrow internationally using their own currency. Results suggest that the optimal level of international reserves is fairly large because their cost is mitigated by valuation-smoothing gains. The model matches some features of Brazil’s economic fluctuations.

Sovereign Risk, Currency Risk, and Corporate Balance Sheets

Why would a country default on its sovereign debt when the government could instead inflate it away? The authors argue that a government is more inclined to default than inflate when the currency mismatch of the corporate sector implies large adverse balance sheet effects from a currency depreciation. To make this argument they construct a dataset on the currency composition of emerging market external borrowing. Results show that the corporate sector relies on external foreign currency debt even as sovereigns have swiftly moved toward borrowing in their own currency.

Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy

This paper explains the relation between sovereign debt portfolios and government bond risks across countries. It demonstrates how the interaction of lender risk aversion and monetary credibility can explain why countries with positive bond-stock betas have the lowest local currency debt share. The framework gives rise to testable predictions on inflation, inflation cyclicality, sovereign debt portfolios, and proxies of effective monetary policy credibility, which the authors verify in the data. Overall, the study contributes to and builds upon the literature of government debt asset pricing.

The Costs of Sovereign Default: Evidence from Argentina

For several decades, one of the most important questions in international macroeconomics has been “why do governments repay their debts?” This study provides evidence that a sovereign default significantly reduces the value of domestic firms. Foreign-owned firms, exporters, banks, and large firms are particularly hurt more by increases in the probability of sovereign default.

Fiscal Rules and Sovereign Default

As they catch up to developed ones, emerging countries tend to overborrow and often default on their debt. This study by Laura Alfaro and Fabio Kanczuk analyzes the welfare gains from alternative fiscal rules, finding the gains economically important. What is more, a simple, easily contractible threshold rule can generate gains virtually as high as the optimal rule.