Non-defaultable debt and sovereign risk /

Non-defaultable debt and sovereign risk /

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Bibliographic Details
Author / Creator:Hatchondo, Juan Carlos, author.
Imprint:Washington, D.C. : International Monetary Fund, IMF Institute for Capacity Development, 2014.
Description:1 online resource (25 pages)
Language:English
Series:IMF working paper ; WP14/198
IMF working paper ; WP14/198.
Subject:
Debts, Public -- Econometric models.
Default (Finance) -- Econometric models.
Debts, Public -- Econometric models.
Default (Finance) -- Econometric models.
Electronic books.
Format: E-Resource Book
URL for this record:http://pi.lib.uchicago.edu/1001/cat/bib/12504138
Hidden Bibliographic Details
Other authors / contributors:Martínez, Leonardo, author.
Onder, Yasin Kursat, author.
International Monetary Fund.
International Monetary Fund. Institute for Capacity Development, issuing body.
ISBN:9781484340660
1484340663
Notes:"October 2014."
Summary:"The authors quantify gains from introducing non-defaultable debt as a limited additional financing option into a model of equilibrium sovereign risk. They find that, for an initial (defaultable) sovereign debt level equal to 66 percent of trend aggregate income and a sovereign spread of 2.9 percent, introducing the possibility of issuing non-defaultable debt for up to 10 percent of aggregate income reduces immediately the spread to 1.4 percent, and implies a welfare gain equivalent to a permanent consumption increase of 0.9 percent. The spread reduction would be only 0.1 (0.2) percentage points higher if the government uses nondefaultable debt to buy back (finance a 'voluntary' debt exchange for) previously issued defaultable debt. Without restrictions to defaultable debt issuances in the future, the spread reduction achieved by the introduction of non-defaultable debt is short lived. They also show that allowing governments in default to increase non-defaultable debt is damaging at the time non-defaultable debt is introduced and inconsequential in the medium term. These findings shed light on different aspects of proposals to introduce common euro-area sovereign bonds that could be virtually non-defaultable."--Abstract.

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