Sovereign Defaults and Debt Sustainability: The Debt Recovery Channel

Ibrahima Diarra, Michel Guillard () and Hubert Kempf ()

No 9688, CESifo Working Paper Series from CESifo

Abstract: This paper focuses on the debt recovery channel linking the dynamics of public debt to partial sovereign defaults. We build a simple model which incorporates sovereign default and a debt recovery rule. It depends on a parameter that allows for partial debt recovery. We show that the maximum debt-to-GDP ratio that a country can sustain without defaulting is increasing, nonlinear, and sensitive to the debt-recovery parameter. A higher debt recovery parameter increases the fiscal space but worsens the financial position of a borrowing country after a default episode. We show the empirical relevance of this channel for estimating country-specific fiscal spaces.

Date: 2022
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-mac and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9688

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