Observing bailout expectations during a total eclipse of the sun

Oscar Bernal, Kim OOSTERLINCK () and Ariane Szafarz

No 09-01.RS, Working Papers DULBEA from Université libre de Bruxelles, Department of Applied Economics (DULBEA)

Abstract: Exploiting an exceptional historical example, this paper proposes an original method to address the existence of sovereign creditor moral hazard. As the coronas which are observable only during a total eclipse of the sun, market-specific prices of repudiated bonds are observable only when extreme conditions (a war, in this instance) segment the markets. Such events are very rare but insightful as they allow for isolating pure country-specific bailout expectations. The paper shows that bailouts do indeed create creditor moral hazard. Based on an impulse response analysis, the econometric results further emphasize the influence of bailout expectations in sovereign bonds valuation.

Keywords: bailout; bonds; moral hazard; repudiation; sovereign debt; Soviet; Russia (search for similar items in EconPapers)
JEL-codes: F33 F34 G1 N24 (search for similar items in EconPapers)
Date: 2009-01
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Related works:
Working Paper: Observing bailout expectations during a total eclipse of the sun (2008)
Working Paper: Observing bailout expectations during a total eclipse of the sun (2009)
Working Paper: Observing bailout expectations during a total eclipse of the sun (2008)
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