Template-type: ReDIF-Paper 1.0
Author-Name: Dr. Christian Grisse
Author-Name-First: Christian
Author-Name-Last: Grisse
Author-Person: pgr250
Author-Name: Gisle J. Natvik
Author-Name-First: Gisle J.
Author-Name-Last: Natvik
Author-Person: pna248
Title: Sovereign debt crises and cross-country assistance
Abstract: We provide a theoretical study of the interplay between cross-country assistance and expectations-driven sovereign debt crises. A self-interested "safe" country may choose to assist a "risky" country that is prone to default. Investors internalize the potential for assistance when lending to fragile countries. If the safe country is not able to commit to or rule out cross-country transfers, assistance only improves the equilibrium outcomes if the risky country is fundamentally insolvent and cannot handle its debt even at the risk-free interest rate. If a default requires pessimistic expectations, an incentive-compatible assistance policy has adverse side effects.
Length: 21 pages
Creation-Date: 2018
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2018/working_paper_2018_15
File-Format: text/html
Number: 2018-15
Classification-JEL: F34
Keywords: Sovereign default, self-fulfilling expectations, bailout
Handle: RePEc:snb:snbwpa:2018-15