Abstract

http://ssrn.com/abstract=2023428
 
 

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Sovereign Default, Domestic Banks, and Financial Institutions


Nicola Gennaioli


Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Alberto Martin


Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR)

Stefano Rossi


Krannert School of Management; Centre for Economic Policy Research (CEPR)

April 29, 2013

Journal of Finance, Forthcoming

Abstract:     
We present a model of sovereign debt in which, contrary to conventional wisdom, government defaults are costly because they destroy the balance sheets of domestic banks. In our model, better financial institutions allow banks to be more leveraged, thereby making them more vulnerable to sovereign defaults. Our predictions: government defaults should lead to declines in private credit, and these declines should be larger in countries where financial institutions are more developed and banks hold more government bonds. In these same countries, government defaults should be less likely. Using a large panel of countries, we find evidence consistent with these predictions.

Number of Pages in PDF File: 55

Keywords: Sovereign Risk, Capital Flows, Institutions, Financial Liberalization, Sudden Stops

JEL Classification: F34, F36, G15, H63

Accepted Paper Series


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Date posted: March 16, 2012 ; Last revised: September 13, 2013

Suggested Citation

Gennaioli, Nicola and Martin, Alberto and Rossi, Stefano, Sovereign Default, Domestic Banks, and Financial Institutions (April 29, 2013). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2023428 or http://dx.doi.org/10.2139/ssrn.2023428

Contact Information

Nicola Gennaioli
Bocconi University - Department of Finance ( email )
Via Roentgen 1
Milano, MI 20136
Italy
Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )
Via Roentgen 1
Milan, 20136
Italy
Alberto Martin
Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )
Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Stefano Rossi (Contact Author)
Krannert School of Management ( email )
West Lafayette, IN 47907-1310
United States
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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