Sovereign Default, Domestic Banks and Financial Institutions

Nicola Gennaioli, Stefano Rossi and Martín, Alberto
Authors registered in the RePEc Author Service: Alberto Martin

No 7955, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We build a model where sovereign defaults weaken banks? balance sheets because banks hold sovereign bonds, causing private credit to decline. Stronger financial institutions boost default costs by amplifying these balance-sheet effects. This yields a novel complementarity between public debt and domestic credit markets, where the latter sustain the former by increasing the costs of default. We document three novel empirical facts that are consistent with our model's predictions: public defaults are followed by large private credit contractions; these contractions are stronger in countries where banks hold more public debt and financial institutions are stronger; in these same countries default is less likely.

Keywords: Capital flows; Financial liberalization; Institutions; Sovereign risk; Sudden stops (search for similar items in EconPapers)
JEL-codes: F34 F36 G15 H63 (search for similar items in EconPapers)
Date: 2010-08
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Citations: View citations in EconPapers (63)

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Related works:
Working Paper: Sovereign Default, Domestic Banks and Financial Institutions (2015)
Journal Article: Sovereign Default, Domestic Banks, and Financial Institutions (2014)
Working Paper: Sovereign Default, Domestic Banks, and Financial Institutions (2012)
Working Paper: Sovereign default, domestic banks and financial institutions (2012)
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