Sovereign Defaults and Debt Sustainability: A Joint Analysis

Ibrahima Diarra, Michel Guillard () and Hubert Kempf ()
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Ibrahima Diarra: EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay
Michel Guillard: EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay
Hubert Kempf: ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po

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Abstract: We build a stochastic model of excusable sovereign default which incorporates a simple debt recovery rule. It depends on a single parameter that allows for partial debt recovery. We show that the maximum debt-to-GDP ratio that a country can sustain without defaulting is increasing, nonlinear, and sensitive to the debt-recovery parameter. We study the dynamics of public debt when the default premium is taken into account and offer new definitions of public debt unsustainability. A higher debt recovery parameter increases the fiscal space but worsens the financial position of a borrowing country after a default episode. We show that the estimated debt-recovery parameter is lower for emerging countries than for developed countries.

Keywords: Public Debt Sustainability; Sovereign Default; Partial Default (search for similar items in EconPapers)
Date: 2025-01
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-05514894v1
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