Self-fulfilling crises and country solidarity

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• dc.contributor.author Marin, Emile-Alexandreca
• dc.date.accessioned 2018-09-27T12:39:40Z
• dc.date.available 2018-09-27T12:39:40Z
• dc.date.issued 2018-05
• dc.description.abstract Sovereign risk premia reflect investors’ beliefs for the equilibrium and off –equilibrium actions of international agents. This paper investigates the international dimension of self-fulfilling sovereign debt crises and characterizes self-interested bailouts (solidarity) and contagion. A credible bailout guarantee by a partner country or international agency can lower a debtor country’s borrowing costs and reduce the probability of belief driven default. However, time consistency undermines an international agent’s ability to commit to intervention. Investors internalise the probability that a bailout never materializes and this endogenously increases its cost. Hence solidarity will generally be insufficient to rule out non-fundamental equilibria, explaining why high sovereign debt yields can persist despite guarantees. When countries are heavily indebted, expectations of default in one country’s debt market can result in the default of its economic partner. Moreover, while large international agents are able to resolve the coordination failure, in contrast to the market, they internalise spillover costs of default and cannot credibly enforce repayment. Introducing information asymmetries results in novel on-equilibrium debt dynamics.ca
• dc.description.sponsorship The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
• dc.format.mimetype application/pdfca
• dc.identifier.uri http://hdl.handle.net/10230/35531
• dc.language.iso engca
• dc.relation.ispartofseries ADEMU Working Paper Series;136
• dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/649396
• dc.rights This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.ca
• dc.rights.accessRights info:eu-repo/semantics/openAccessca
• dc.rights.uri https://creativecommons.org/licenses/by/4.0/ca
• dc.subject.other Sovereign risk and defaultca
• dc.subject.other Self-fulfilling crisesca
• dc.subject.other Bailoutsca
• dc.title Self-fulfilling crises and country solidarityca
• dc.type info:eu-repo/semantics/workingPaperca