The long and the short of it: Sovereign debt crises and debt maturity

Raquel Fernández and Alberto Martin

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We present a simple model of sovereign debt crises in which a country chooses its optimal mix of short and long-term bonds subject to standard contracting frictions: the country cannot commit to repay its debts nor to a specific path of future debt issues, and contracts cannot be made state contingent nor renegotiated. We show that, in order to reduce incentives to engage in debt dilution, the country must issue short-term debt. This exposes it to roll-over crises and inefficient repayments. We examine the effects of alternative restructuring regimes, which either write-down debt or extend its maturity in the event of crises, and show that both necessarily improve ex ante welfare if they they do not decrease expected payments to creditors during crises. In particular, we show that the way in which these regimes redistribute payments between short- and long-term creditors, which has been a central point in recent policy debates, is inconsequential.

Keywords: sovereign debt; dilution; optimal maturity; restructuring; reprofiling; IMF; debt crises. (search for similar items in EconPapers)
JEL-codes: F33 F34 F36 F41 G15 (search for similar items in EconPapers)
Date: 2014-12, Revised 2015-09
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (23)

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Related works:
Working Paper: The Long and the Short of It: Sovereign Debt Crises and Debt Maturity (2015)
Working Paper: The Long and the Short of It: Sovereign Debt Crises and Debt Maturity (2014)
Working Paper: The Long and the Short of It: Sovereign Debt Crises and Debt Maturity (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1459

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