Sovereign Debt and Incentives to Default with Uninsurable Risks

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

CRETA Online Discussion Paper Series from Centre for Research in Economic Theory and its Applications CRETA

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 JEL classification numbers: F34; H63 (search for similar items in EconPapers)
Date: 2016
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https://warwick.ac.uk/fac/soc/economics/research/c ... ninsurable_risks.pdf

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)
Working Paper: Sovereign Debt and Incentives to Default with Uninsurable Risks (2016)
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