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.

Table of Contents:

Cover; Contents; I. Introduction; II. Model; A. Recursive formulation; B. Recursive equilibrium; III. Calibration; IV. Results; Tables; 1. Parameter values; A. Effects of introducing non-defaultable bonds; 2. Effects of introducing non-defaultable bonds; Figures; 1. Debt after the introduction of non-defaultable bonds; 2. Default decision with and without non-defaultable bonds; B. Debt buybacks; 3. Effects of introducing non-defaultable bonds with a defaultable-debt buyback; C. "Voluntary" debt exchanges; 3. Debt after the introduction of non-defaultable bonds through a buyback.
D. Long-run effect of non-defaultable on default risk4. Effects of introducing non-defaultable bonds with a "voluntary" debt exchange; 4. Sovereign spread after the introduction of non-defaultable bonds; E. Voluntary debt exchanges with a limit for defaultable debt; F. Issuances of non-defaultable bonds during defaults; 5. Effects of introducing non-defaultable bonds with a limit for defaultable debt; V. Conclusions; References.

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