Sovereign Debt Without Default Penalties

Review of Economic Studies, 2009, vol. 76, pp. 1297-1320.

32 Pages Posted: 28 Feb 2006 Last revised: 8 Dec 2012

See all articles by Alexander Guembel

Alexander Guembel

Toulouse School of Economics, University of Toulouse Capitole

Oren Sussman

University of Oxford - Said Business School; Ben-Gurion University of the Negev; University of London; University of Oxford - Said Business School

Date Written: December 7, 2012

Abstract

We develop a theory of sovereign borrowing where default penalties are not implementable. We show that when debt is held by both domestic and foreign agents, the median voter might have an interest in serving it. Our theory has important practical implications regarding a) the role of financial intermediaries in sovereign lending; b) the effect of capital flows on price volatility including the possible over-valuation of debt to the point that the median voter is priced out of the market; and c) debt restructuring where creditors are highly dispersed.

Keywords: Sovereign debt restructuring, debt crisis, median voter, political economy

JEL Classification: D72, F34, G15

Suggested Citation

Guembel, Alexander and Sussman, Oren, Sovereign Debt Without Default Penalties (December 7, 2012). Review of Economic Studies, 2009, vol. 76, pp. 1297-1320.. Available at SSRN: https://ssrn.com/abstract=885434 or http://dx.doi.org/10.2139/ssrn.885434

Alexander Guembel (Contact Author)

Toulouse School of Economics, University of Toulouse Capitole ( email )

Manufacture des Tabacs
21, allee de Brienne
Toulouse, 31000
France

Oren Sussman

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 926 (Phone)
+44 1865 288 805 (Fax)

Ben-Gurion University of the Negev

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ISRAEL

University of London ( email )

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London, London NW1 4SA
United Kingdom

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 926 (Phone)
+44 1865 288 805 (Fax)

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