The Dynamics of Sovereign Debt Crises and Bailouts

Harald Uhlig () and Francisco Roch

No 12921, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 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.

Keywords: Default; Bailouts; Self-fulfilling crises; Endogenous borrowing constraints; Long-term debt; Omt; Eurozone debt crisis (search for similar items in EconPapers)
JEL-codes: F34 F41 (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-cba and nep-eec
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Citations: View citations in EconPapers (62)

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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 (2016)
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