Default Externalities in Emerging Market Systemic Private Debt Crises

Rocio Gondo Mori

No 2013-023, Working Papers from Banco Central de Reserva del Perú

Abstract: This paper analyzes how default externalities lead to an excessive incidence of systemic private debt crises. An individual defaulting borrower does not internalize that her default leads to a depreciation in the exchange rate because international lenders will sell any seizable assets and flee the country. The exchange rate depreciation in turn reduces the value of non-tradable collateral and induces other borrowers to default, leading to a chain reaction of defaults. The inefficiency in default spillovers can be corrected by strengthening the enforcement of creditor rights, so that individual agents default less often, reducing the frequency of systemic default.

Keywords: Financial crisis; default; capital ows; pecuniary externalities; creditor rights; real exchange rate (search for similar items in EconPapers)
JEL-codes: D62 F32 F41 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:rbp:wpaper:2013-023

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