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Intertwined Sovereign and Bank Solvencies in a Model of Self-Fulfilling Crisis

Gustavo Adler

No 12/178, IMF Working Papers from International Monetary Fund

Abstract: 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)
New Economics Papers: this item is included in nep-ban and nep-cba
Date: 2012-07-01
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