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Sovereign debt crises and cross-country assistance

Christian Grisse () and Gisle Natvik

No 2018-15, Working Papers from Swiss National Bank

Abstract: We provide a theoretical study of the interplay between cross-country assistance and expectations-driven sovereign debt crises. A self-interested "safe" country may choose to assist a "risky" country that is prone to default. Investors internalize the potential for assistance when lending to fragile countries. If the safe country is not able to commit to or rule out cross-country transfers, assistance only improves the equilibrium outcomes if the risky country is fundamentally insolvent and cannot handle its debt even at the risk-free interest rate. If a default requires pessimistic expectations, an incentive-compatible assistance policy has adverse side effects.

Keywords: Sovereign default; self-fulfilling expectations; bailout (search for similar items in EconPapers)
JEL-codes: F34 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2018
New Economics Papers: this item is included in nep-opm
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