Sovereign Debt Sustainability with Involuntary Default

Jean Rochet, Fabrice Collard, Michel Habib and Ugo Panizza

No 24-1599, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: We study the sustainability of sovereign debt under the assumption of involuntary and costly default: governments do their utmost to avoid default, which reduces the resources available for debt service. We show that costly default tightens Blanchard’s g > r condition. We derive a formula for a government’s maximum sustainable debt (MSD), which depends on the mean and the volatility of the country’s growth rate, the government’s maximum primary surplus, the risk-free rate, and the fraction of resources available to the government in default. We compute MSD for 12 Eurozone countries and examine the role of the European Stability Mechanism in increasing MSD.

Keywords: Sovereign Debt; Default; Maximum Sustainable Debt (search for similar items in EconPapers)
JEL-codes: E62 F34 H63 (search for similar items in EconPapers)
Date: 2024-12-05
New Economics Papers: this item is included in nep-eec, nep-env and nep-opm
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Working Paper: Sovereign Debt Sustainability with Involuntary Default (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:129958

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