Template-Type: ReDIF-Paper 1.0
Title: Sovereign Borrowing, Financial Assistance and Debt Repudiation
Author-Name: Florian Kirsch
Author-Email:fkirsch@uni-bonn.de
Author-Name: Ronald Rühmkorf
Author-Email:ruehmkorf@uni-bonn.de
Classification-JEL: F34, G15, O19
Keywords: Sovereign debt, Sovereign default, Self-fulfilling runs, Bailout

Abstract: 	Official lenders provide financial assistance to countries 
		that face sovereign debt crisis. The availability of 
		financial assistance has counteracting effects on the 
		default incentives of governments. On the one hand, 
		financial assistance can help to avoid defaults by 
		bridging times of fundamental crises or resolving 
		coordination failures among private investors. On the 
		other hand, the insurance effect of financial assistance 
		lowers borrowing costs which induces the sovereign to 
		accumulate higher debt levels. To assess the overall 
		effect of financial assistance on the probability of 
		default we construct a quantitative model of endogenous 
		credit structure and sovereign default that allows for 
		self-fulfilling expectations of default. Calibrating the 
		model to Argentinean data we find that the availability of 
		financial assistance reduces the number of defaults that 
		occur due to self-fulfilling runs by private investors. 
		However, at the same time it raises average debt levels 
		causing an overall increase of the probability of default.
Note: 
Length: 33
Creation-Date: 2013-01
Revision-Date: 
File-URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse01_2013.pdf
File-Format: application/pdf
Handle: RePEc:bon:bonedp:bgse01_2013