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Non-defaultable debt and sovereign risk

Juan Hatchondo, Leonardo Martinez and Yasin Onder

Journal of International Economics, 2017, vol. 105, issue C, 217-229

Abstract: We quantify gains from introducing limited financing through non-defaultable debt into a model of equilibrium sovereign risk. For an initial sovereign spread of 4.2%, introducing the possibility of issuing non-defaultable debt for up to 10% of aggregate income reduces immediately the spread to 1.5%, and implies a welfare gain equivalent to a permanent consumption increase of 0.8%. Nevertheless, the spread reduction achieved by the introduction of non-defaultable debt is short lived. Our findings shed light on different aspects of proposals to introduce common euro-area sovereign bonds that could be virtually non-defaultable.

Keywords: Sovereign default; Sovereign debt; Eurobonds; Red bonds; Blue bonds; Buyback; Voluntary debt exchange; Common euro-area sovereign bonds (search for similar items in EconPapers)
JEL-codes: F30 F34 (search for similar items in EconPapers)
Date: 2017
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Related works:
Working Paper: Non-Defaultable Debt and Sovereign Risk (2016)
Working Paper: Non-Defaultable Debt and Sovereign Risk (2014) Downloads
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DOI: 10.1016/j.jinteco.2017.01.008

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