Financial Deregulation, Private Foreign Borrowing and the Risk of Sovereign Default: A Political-Economic Analysis

19 Pages Posted: 18 Apr 2010

See all articles by Oya Celasun

Oya Celasun

International Monetary Fund (IMF) - Research Department

Philipp Harms

Study Centre Gerzensee

Date Written: April 1, 2010

Abstract

It is often argued that financial liberalization and large external borrowing by the private sector bode ill for sovereign creditworthiness. In this paper, we highlight a channel through which financial liberalization reduces the risk that a developing country’s government defaults on its foreign debt. We present a simple model in which a deregulation-induced surge in private borrowing raises the political costs of default and reduces a government’s incentive to deny repayment.

Keywords: International Investment, Sovereign Risk

JEL Classification: F34, O16

Suggested Citation

Celasun, Oya and Harms, Philipp, Financial Deregulation, Private Foreign Borrowing and the Risk of Sovereign Default: A Political-Economic Analysis (April 1, 2010). Frontiers in Finance and Economics, Vol. 7, No. 1, pp. 82-100, April 2010, Available at SSRN: https://ssrn.com/abstract=1590946

Oya Celasun (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Philipp Harms

Study Centre Gerzensee ( email )

CH-3115 Gerzensee
Switzerland

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