The Long and the Short of It: Sovereign Debt Crises and Debt Maturity / Raquel Fernández, Alberto Martin.

Format:

Book

Author/Creator:

Fernández, Raquel.

Contributor:

National Bureau of Economic Research.

Martin, Alberto.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20786.

NBER working paper series no. w20786

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Long and the Short of It

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

We present a simple model of sovereign debt crises in which a country chooses its optimal mix of short and long-term bonds 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 nor renegotiated. We show that, in order to reduce incentives to engage in debt dilution, the country must issue short-term debt. This exposes it to roll-over crises and inefficient repayments. We examine the effects of alternative restructuring regimes, which either write-down debt or extend its maturity in the event of crises, and show that both necessarily improve ex ante welfare if they do not decrease expected payments to creditors during crises. In particular, we show that the way in which these regimes redistribute payments between short- and long-term creditors, which has been a central point in recent policy debates, is inconsequential.

Notes:

Print version record

December 2014.