Liquidity Crises, Liquidity Lines and Sovereign Risk

Yasin Onder

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: This paper quantitatively investigates the trade-offs of introducing an extra line of credit in an emergency situation. I show that temporary access to these lines for up to 3 percent of mean annual income during low liquidity periods yields long-term effects with a lower cost of borrowing but with incentives to accumulate higher debt. Permanent access, however, has only short-lived effects because temporal arrangement better completes the markets and induces market discipline as the government worries about rollover risk once the low liquidity period ends. I also present in an event analysis that Mexico’s arrangement of swap lines with the Federal Reserve amid the global financial crisis in 2008 helped avoid a potential debt crisis.

Keywords: sovereign default; liquidity shocks; swap lines; sudden stops (search for similar items in EconPapers)
JEL-codes: F30 F34 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2021-10
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-cwa, nep-dge, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://wps-feb.ugent.be/Papers/wp_21_1029.pdf (application/pdf)

Related works:
Journal Article: Liquidity crises, liquidity lines and sovereign risk (2022)
Working Paper: Liquidity Crises, Liquidity Lines and Sovereign Risk (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:21/1029

Access Statistics for this paper

More papers in Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration Contact information at EDIRC.
Bibliographic data for series maintained by Nathalie Verhaeghe ().