Sovereign Defaults: Information, Investment and Credit

Guido Sandleris
Authors registered in the RePEc Author Service: Martin Sola

Business School Working Papers from Universidad Torcuato Di Tella

Abstract: Why would a sovereign government, immune from bankruptcy procedures and with few assets that could be seized in the event of a default, ever repay foreign creditors? And, correspondingly, why do foreign creditors lend to sovereigns? This paper finds general conditions under which, even in the absence of sanctions, lending to sovereigns can emerge in a single shot game. Furthermore, it shows that positive borrowing can be sustained both in pooling and separating equilibria. In this way, it makes clear that neither sanctions nor reputation considerations, the two classical explanations, are necessary to enforce repayment. Information revelation is the crucial mechanism for these results. The repayment/default decision is interpreted as a signal used by the government to communicate information to domestic and foreign agents about the fundamentals of the economy. Governments repay to affect agents' expectations about them. A default, through its effect on expectations about fundamentals, can generate a decline in foreign and domestic investment and a credit crunch in domestic credit markets. Governments repay to avoid these costs, but may default (in equilibrium) when hit by a negative shock.

Pages: 22 pages
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (76)

Downloads: (external link)
http://www.utdt.edu/download.php?fname=_123626283592761100.pdf (application/pdf)

Related works:
Journal Article: Sovereign defaults: Information, investment and credit (2008)
Working Paper: Sovereign Defaults: Information, Investment and Credit (2005)
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:udt:wpbsdt:2008-04

Access Statistics for this paper

More papers in Business School Working Papers from Universidad Torcuato Di Tella Contact information at EDIRC.
Bibliographic data for series maintained by Nicolás Del Ponte ( this e-mail address is bad, please contact ).