Geopolitical Fragmentation, Sovereign Debt, and Dollar Dominance

Felipe Benguria, Eugenio I. Rojas and Felipe Saffie

No 35272, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Countries borrow in dollars because dollar debt markets are deep and liquid. This paper develops a theory of when that dominance becomes fragile because countries have inherited dollar liabilities but increasingly earn yuan-linked revenues. In the model, countries begin with dollar-denominated sovereign debt. Geopolitical fragmentation raises their yuan revenue share through two channels: higher trade barriers with dollar-linked markets shift exports toward yuan-linked markets, and higher costs of using dollars in that trade make yuan settlement more attractive. Governments then face a choice: repay dollar debt using revenues that are less dollar-linked, default, or restructure into yuan. The paper identifies a liquidity spillover from restructuring: dollar-to-yuan restructurings deepen yuan debt markets, lowering refinancing costs and encouraging additional restructurings. The model shows when fragmentation produces limited restructuring and when it triggers a self-reinforcing shift from dollar debt to yuan debt. A cascade requires the liquidity feedback from yuan restructuring to be stronger than the dispersion in countries’ yuan revenue exposure.

JEL-codes: F36 F55 G15 (search for similar items in EconPapers)
Date: 2026-05
Note: EFG IFM ITI
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w35272.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:35272

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w35272
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().