The Dynamics of Sovereign Debt Crises and Bailouts

47 Pages Posted: 9 Dec 2016

See all articles by Francisco Roch

Francisco Roch

International Monetary Fund (IMF)

Harald Uhlig

University of Chicago - Department of Economics

Date Written: July 2016

Abstract

Motivated by the recent European debt crisis, this paper investigates the scope for a bailout guarantee in a sovereign debt crisis. Defaults may arise from negative income shocks, government impatience or a "sunspot"-coordinated buyers strike. We introduce a bailout agency, and characterize the minimal actuarially fair intervention that guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing. The intervention makes it cheaper for governments to borrow, inducing them borrow more, leaving default probabilities possibly rather unchanged. The maximal backstop will be pulled precisely when fundamentals worsen.

Keywords: Sovereign debt defaults, Euro Area, Financial crises, Private sector, Debt markets, Econometric models, Default, Bailouts, Self-fulfilling Crises, Endogenous Borrowing Constraints, Long-term Debt, OMT, Eurozone Debt Crisis.

JEL Classification: F34, F41

Suggested Citation

Roch, Francisco and Uhlig, Harald, The Dynamics of Sovereign Debt Crises and Bailouts (July 2016). IMF Working Paper No. 16/136, Available at SSRN: https://ssrn.com/abstract=2882571

Francisco Roch (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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