The Long and the Short of It: Sovereign Debt Crises and Debt Maturity

Raquel Fernández and Alberto Martin

No 818, Working Papers from Barcelona School of Economics

Abstract: We present a simple model of sovereign debt crises in which a country chooses its optimal mix of short and long-term debt contracts subject to standard contracting frictions: the country cannot commit to repay its debts nor to a specific path of future debt issues, and contracts cannot be made state contingent nor renegotiated. We show that in order to satisfy incentive compatibility the country must issue short-term debt, which exposes it to roll-over crises and inefficient repayments. We examine two policies – restructuring and reprofiling – and show that both improve ex ante welfare if structured correctly. Key to the welfare results is the country's ability to choose its debt structure so as to neutralize any negative effect resulting from the redistribution of payments across creditors in times of crises.

Keywords: sovereign debt; dilution; optimal maturity; restructuring; reprofiling; IMF (search for similar items in EconPapers)
JEL-codes: F33 F34 F36 F41 G1 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (21)

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Related works:
Working Paper: The long and the short of it: Sovereign debt crises and debt maturity (2015)
Working Paper: The Long and the Short of It: Sovereign Debt Crises and Debt Maturity (2014)
Working Paper: The Long and the Short of It: Sovereign Debt Crises and Debt Maturity (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:818

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