Sovereign Defaults and Debt Sustainability: A Joint Analysis

Ibrahima Diarra, Michel Guillard and Hubert Kempf ()
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Ibrahima Diarra: Université Paris-Saclay, Univ Evry, EPEE
Michel Guillard: Université Paris-Saclay, Univ Evry, EPEE
Hubert Kempf: Université Paris-Saclay, ENS Paris-Saclay, CEPS

Open Economies Review, 2025, vol. 36, issue 5, No 3, 1365-1412

Abstract: 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)
JEL-codes: E44 F34 H6 H62 H63 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11079-025-09806-8

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