Research / BFI Working PaperMay 08, 2018

The Dynamics of Sovereign Debt Crises and Bailouts

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 strategy with the minimal actuarially fair intervention which 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.

More Research From These Scholars

BFI Working Paper Jul 1, 2011

Economics and Reality

Topics:  Fiscal Studies, Monetary Policy
BFI Working Paper Jul 14, 2022

A Luna-tic Stablecoin Crash

Harald Uhlig
Topics:  Financial Markets
BFI Working Paper Feb 21, 2022

Cryptocurrencies, Currency Competition, and the Impossible Trinity

Pierpaolo Benigno, Linda M. Schilling, Harald Uhlig
Topics:  Financial Markets