Sovereign Debt Sustainability with Involuntary Default

Fabrice Collard, Michel Habib, Ugo Panizza and Jean Rochet
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Fabrice Collard: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Michel Habib: UZH - Universität Zürich [Zürich] = University of Zurich

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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)
Date: 2024-12-06
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Working Paper: Sovereign Debt Sustainability with Involuntary Default (2024)
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