Intertwined Sovereign and Bank Solvencies in a Model of Self-Fulfilling Crisis
No 12/178, IMF Working Papers from International Monetary Fund
Large fiscal financing needs, both in advanced and emerging market economies, have often been met by borrowing heavily from domestic banks. As public debt approached sustainability limits in a number of countries, however, high bank exposure to sovereign risk created a fragile inter-dependence between fiscal and bank solvency. This paper presents a simple model of twin (sovereign and banking) crisis that stresses how this interdependence creates conditions conducive to a self-fulfilling crisis.
Keywords: Financial crisis; Banking crisis; Banks; Public debt; sovereign debt crisis, twin crisis, financial intermediaries, bonds, domestic borrowing, bond, domestic debt, Financial Markets and the Macroeconomy, (search for similar items in EconPapers)
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