The Long and the Short of it: Sovereign Debt Crises and Debt Maturity

42 Pages Posted: 23 Jan 2015

See all articles by Raquel Fernández

Raquel Fernández

New York University - Leonard N. Stern School of Business, Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Alberto Martin

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

Multiple version iconThere are 2 versions of this paper

Date Written: December 2014

Abstract

We present a simple model of sovereign debt crises in which a country chooses its optimal mix of short and long-term debt contracts subject to standard contracting frictions: the country cannot commit to repay its debts nor to a specific path of future debt issues, and contracts cannot be made state contingent. We show that in order to satisfy incentive compatibility the country must issue short-term debt, which exposes it to roll-over crises and inefficient repayments. We examine two policies -- restructuring and reprofiling -- and show that both improve ex ante welfare if structured correctly. Key to the welfare results is the country's ability to choose its debt structure so as to neutralize any negative effects resulting from redistribution of payments across creditors in times of crises.

Keywords: dilution, optimal maturity, sovereign debt

JEL Classification: F15, F33, F34, F36, F41

Suggested Citation

Fernández, Raquel and Martin, Alberto, The Long and the Short of it: Sovereign Debt Crises and Debt Maturity (December 2014). CEPR Discussion Paper No. DP10322, Available at SSRN: https://ssrn.com/abstract=2554397

Raquel Fernández (Contact Author)

New York University - Leonard N. Stern School of Business, Department of Economics ( email )

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New York, NY 10003
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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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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 )

London
United Kingdom

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