Sovereign Debt Crises

Oxford Handbook of Banking, Forthcoming

FRB International Finance Discussion Paper No. 1104

41 Pages Posted: 29 Aug 2014

See all articles by Ricardo Correa

Ricardo Correa

Board of Governors of the Federal Reserve System

Horacio Sapriza

Board of Governors of the Federal Reserve System

Date Written: May 26, 2014

Abstract

Sovereign debt crises have been recurrent events over the past two centuries. In recent years, the timing of sovereign crises has coincided or has directly followed banking crises. The link between sovereigns and banks tightened as the contingent liability that the banking sector represents for the sovereign grew, as financial “safety nets” became more common. This chapter analyzes the transmission channels between sovereigns and banks, with a focus on the effect of sovereign distress on bank solvency and financing. It then highlights the notable cost to the real economy of the close connection between sovereigns and banks. Breaking the “feedback loop” between these two sectors should be an important policy priority.

Keywords: Sovereign default, banking crises, government guarantees, financial safety net, bank regulation

JEL Classification: E44, F34, G01, G28

Suggested Citation

Correa, Ricardo and Sapriza, Horacio, Sovereign Debt Crises (May 26, 2014). Oxford Handbook of Banking, Forthcoming; FRB International Finance Discussion Paper No. 1104. Available at SSRN: https://ssrn.com/abstract=2487523

Ricardo Correa (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Horacio Sapriza

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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