Sovereign default

Summary

A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full when due. Cessation of due payments (or receivables) may either be accompanied by that government's formal declaration that it will not pay (or only partially pay) its debts (repudiation), or it may be unannounced. A credit rating agency will take into account in its gradings capital, interest, extraneous and procedural defaults, and failures to abide by the terms of bonds or other debt instruments. Countries have at times escaped some of the real burden of their debt through inflation. This is not "default" in the usual sense because the debt is honored, albeit with currency of lesser real value. Sometimes governments devalue their currency. This can be done by printing more money to apply toward their own debts, or by ending or altering the convertibility of their currencies into precious metals or foreign currency at fixed rates. Harder to quantify than an interest or

Official source

https://en.wikipedia.org/wiki/Sovereign_default

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This article shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary independence, lenders anticipate that the government would face a severe recession in the event of a liquidity crisis and are therefore more prone to run on government bonds. In a quantitative application to the Eurozone debt crisis, we find that the lack of monetary autonomy played a central role in making Spain vulnerable to a rollover crisis. Finally, we argue that a lender of last resort can go a long way toward reducing the costs of giving up monetary independence.

OXFORD UNIV PRESS INC2022

Volatility and Sovereign Default

Luisa Lambertini

Over and over again, history shows that countries default on external debt when their economies experience a downturn. This paper presents a theoretical model of international lending that is consistent with this evidence. Productivity is stochastic and international capital markets are incomplete in two ways: the only internationally traded assets are non-contingent real bonds and borrowers cannot commit to repay loans. Low productivity realizations get carried forward through low investment that lower output and consumption and eventually result in self-fulfilling or solvency debt crises. When lenders are atomistic, self-fulfilling crises may arise for intermediate debt levels that would not trigger a default with a large lender. Alternative reforms to eliminate liquidity crises are analyzed. An international lender of last resort can eliminate liquidity crises provided it implements full bailouts via purchasing debt at its market price.

2003

Endogenous Debt Constraints in Lifecycle Economies

Luisa Lambertini

We characterize competitive equilibria with perfect foresight in a deterministic, three-period pure-exchange overlapping generations economy with perfect information and no commitment to loan contracts. Commitment is replaced by an enforcement mechanism that excludes defaulters from asset markets for one period. For hump- shaped endowment profiles, young individuals face endogenous debt constraints that ration current consumption. Changes in current and future yields affect these constraints, inducing an additional income effect on rationed household demand that makes current and future consumption complements. This mechanism can lead to multiple steady states, persistent indeterminacy and regime switching. We show that sensitivity to shocks and complex dynamic behavior are consistent with endogenous debt limits but not with exogenous liquidity constraints.

Wiley-Blackwell2003