Sovereign Debt and Incentives to Default with Uninsurable Risks

Gaetano Bloise, Herakles Polemarchakis and Yiannis Vailakis
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Herakles Polemarchakis: Department of Economics, University of Warwick

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: Sovereign debt is not sustainable even in the presence of uninsurable risks; which extends the result of Bulow and Rogoff (1989). But the argument is not as general. Indeed, examples show that positive borrowing may be enforced even though the sovereign’s natural debt limits, corresponding to the most pessimistic evaluation of future endowment, are finite. Unsustainable sovereign debt in incomplete asset markets requires a strong version of high implied interest rates: the value of the most optimistic evaluation of future endowment is finite.

Keywords: Sovereign risk; Ponzi games; Reputational debt; Incomplete markets (search for similar items in EconPapers)
JEL-codes: F34 H63 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-ias
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Sovereign debt and incentives to default with uninsurable risks (2017)
Working Paper: Sovereign debt and incentives to default with uninsurable risks (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1107

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