EconPapers    
Economics at your fingertips  
 

Sovereign Defaults, Domestic Credit Market Institutions and Credit to the Private Sector

Guido Sandleris

Business School Working Papers from Universidad Torcuato Di Tella

Abstract: During sovereign debt crises, even after controlling for the decline in relevant macroeconomic variables, both foreign and domestic credit to the private sector decline. This paper presents a mechanism through which sovereign defaults can lead to this decline, even if domestic agents do not hold government debt. The mechanism highlights the interaction between sovereign defaults, domestic credit market institutions and firms’ collateral constraints. In developing countries firms are usually collateral constrained. In a model with endogenous sovereign debt, a sovereign default, through its effect on expectations about fundamentals, affects the value of the firms’ international and domestic collateral, which limits the availability of foreign and domestic credit. The model also shows that, by attracting private capital flows to the private sector, stronger domestic financial institutions reduce governments’ incentives to default, which, in turn, facilitate public borrowing.

Pages: 25 pages
Date: 2010
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9) Track citations by RSS feed

Downloads: (external link)
http://www.utdt.edu/download.php?fname=_126469453496151400.pdf (application/pdf)

Related works:
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:2010-01

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 ().

 
Page updated 2022-12-01
Handle: RePEc:udt:wpbsdt:2010-01