Sovereign Debt, Default Risk and Fiscal Consolidation in the EZ Periphery

Climate change poses an existential threat to the global economy. While there is a growing body of literature on the economic consequences of climate change, research on the link between climate change and sovereign default risk is nonexistent. We aim to fill this gap in the literature by estimating the impact of climate change vulnerability and resilience on the probability of sovereign debt default. Using a sample of 116 countries over the period 1995–2017, we find that climate change vulnerability and resilience have significant effects on the probability of sovereign debt default, especially among low-income countries. That is, countries with greater vulnerability to climate change face a higher likelihood of debt default compared to more climate resilient countries. These findings remain robust to a battery of sensitivity checks, including alternative measures of sovereign debt default, model specifications, and estimation methodologies.

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Maturity, Indebtedness, and Default Risk

The American Economic Review ◽

10.1257/aer.102.6.2674 ◽

2012 ◽

Vol 102 (6) ◽

pp. 2674-2699 ◽

Cited By ~ 145

Author(s):

Satyajit Chatterjee ◽

Burcu Eyigungor

Keyword(s):

Standard Deviation ◽

Default Risk ◽

Sovereign Debt ◽

External Debt ◽

Equilibrium Price ◽

Short Term ◽

Price Function ◽

Output Ratio ◽

Novel Method

We advance quantitative-theoretic models of sovereign debt by proving the existence of a downward sloping equilibrium price function for long-term debt and implementing a novel method to accurately compute it. We show that incorporating long-term debt allows the model to match Argentina's average external debt-to-output ratio, average spread on external debt, the standard deviation of spreads, and simultaneously improve upon the model's ability to account for Argentina's other cyclical facts. We also investigated the welfare properties of maturity length and showed that if the possibility of self-fulfilling rollover crises is taken into account, long-term debt is superior to short-term debt. (JEL E23, E32, F34, O11, O19)

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Default Risk of Sovereign Debt in Central America

Emerging Markets and Sovereign Risk ◽

10.1057/9781137450661.0008 ◽

2014 ◽

Author(s):

Astrid Ayala ◽

Szabolcs Blazsek ◽

RaÃºl B. GonzÃ¡lez dePaz

Keyword(s):

Central America ◽

Default Risk ◽

Sovereign Debt

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SOVEREIGN DEFAULT, TRADE, AND TERMS OF TRADE

Macroeconomic Dynamics ◽

10.1017/s1365100519000701 ◽

2019 ◽

pp. 1-35 ◽

Cited By ~ 2

Author(s):

Grace Weishi Gu

Keyword(s):

Default Risk ◽

Foreign Debt ◽

Home Bias ◽

Emerging Countries ◽

Terms Of Trade ◽

Sovereign Default ◽

Trade Flows ◽

Income Loss ◽

Debt Default ◽

Sovereign Defaults

Sovereign defaults are associated with income and trade reductions and terms-of-trade deterioration. This paper develops a two-country model to study the interactions between income, trade, terms of trade, and foreign-debt default risk and default events. Such default risk and events are costly because they adversely affect the demand for a borrower country’s intermediate goods exports and its income. Consequently, trade flows change due to the income loss and consumption home bias. The defaulter’s terms of trade also deteriorate endogenously, which accelerates its income and trade losses. The model produces procyclical imports, exports, terms of trade, and other empirical features of emerging countries’ business cycles and default episodes.

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Self-defeating austerity? Assessing the impact of a fiscal consolidation on unemployment

The Economic and Labour Relations Review ◽

10.1177/1035304616689658 ◽

2017 ◽

Vol 28 (1) ◽

pp. 77-90 ◽

Cited By ~ 1

Author(s):

João Carlos Lopes ◽

João Ferreira do Amaral

Keyword(s):

Sovereign Debt ◽

Debt Crisis ◽

The European Union ◽

Budget Balance ◽

Fiscal Consolidation ◽

The Great Recession ◽

Huge Impact ◽

Social Transfers ◽

Balance Trade ◽

The Impact

The great recession of 2008/2009 had a huge impact on unemployment and public finances in most advanced countries, and these impacts were magnified in the southern Euro area by the sovereign debt crisis of 2010/2011. The fiscal consolidation imposed by the European Union on highly indebted countries was based on the assumptions of so-called expansionary austerity. However, the reality so far provides proof to the contrary, and the results outlined in this article support the opposing view of a self-defeating austerity. Based on a model of the input–output relations of the productive system, an unemployment rate/budget balance trade-off equation is derived, as well as the impact of a strong fiscal consolidation based on social transfers and the notion of a neutral budget balance. An application to the Portuguese case confirms the huge costs of a strong fiscal consolidation, both in terms of unemployment and social policy regress. The conclusion is that too much consolidation in anyone year makes consolidation more difficult in the following year.

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Take the Short Route: Equilibrium Default and Debt Maturity

Econometrica ◽

10.3982/ecta14806 ◽

2019 ◽

Vol 87 (2) ◽

pp. 423-462 ◽

Cited By ~ 15

Author(s):

Mark Aguiar ◽

Manuel Amador ◽

Hugo Hopenhayn ◽

Iván Werning

Keyword(s):

Sovereign Debt ◽

Yield Curve ◽

Debt Management ◽

Limited Commitment ◽

Bond Markets ◽

Short Term ◽

Marginal Costs ◽

Wide Range ◽

Debt Default

We study the interactions between sovereign debt default and maturity choice in a setting with limited commitment for repayment as well as future debt issuances. Our main finding is that, under a wide range of conditions, the sovereign should, as long as default is not preferable, remain passive in long‐term bond markets, making payments and retiring long‐term bonds as they mature but never actively issuing or buying back such bonds. The only active debt‐management margin is the short‐term bond market. We show that any attempt to manipulate the existing maturity profile of outstanding long‐term bonds generates losses, as bond prices move against the sovereign. Our results hold regardless of the shape of the yield curve. The yield curve captures the average costs of financing at different maturities but is misleading regarding the marginal costs.

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