Sovereign Debt Without Default Penalties
Oren Sussman and
Alexander Guembel ()
OFRC Working Papers Series from Oxford Financial Research Centre
The basic question regarding sovereign debt is why sovereign borrowers ever repay, provided that creditors have no power to foreclose on any of their assets. In this paper we suggest an answer: sovereign debt will be served as long as the median voter is a net loser from default. Default generates a reallocation of wealth from locals to foreigners, but also from local debtholders to local tax payers. Sovereign debt is stable as long as the median voterâ€™s interests are more aligned with the foreign lenders than with the local taxpayers. We further augment the model with elements of market microstructure theory to address the question how markets rationally use capital flows so as to infer the stability of debt structure. We show that foreign demand shocks can destabilise debt even though they are not fundamental. We also show that more volatile foreign demand reduces a countryâ€™s debt capacity. Our work thus integrates elements of market microstructure theory into politicaleconomy modeling.
New Economics Papers: this item is included in nep-fmk
References: Add references at CitEc
Citations: View citations in EconPapers (83) Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 404 Not Found
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:sbs:wpsefe:2005fe17
Access Statistics for this paper
More papers in OFRC Working Papers Series from Oxford Financial Research Centre Contact information at EDIRC.
Bibliographic data for series maintained by Maxine Collett ().