Geopolitical Fragmentation, Sovereign Debt, and Dollar Dominance / Felipe Benguria, Eugenio I. Rojas, Felipe Saffie.

Format:

Book

Author/Creator:

Benguria, Felipe.

Contributor:

Rojas, Eugenio I.

Saffie, Felipe.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w35272.

NBER working paper series no. w35272

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2026.

Summary:

Countries borrow in dollars because dollar debt markets are deep and liquid. This paper develops a theory of when that dominance becomes fragile because countries have inherited dollar liabilities but increasingly earn yuan-linked revenues. In the model, countries begin with dollar-denominated sovereign debt. Geopolitical fragmentation raises their yuan revenue share through two channels: higher trade barriers with dollar-linked markets shift exports toward yuan-linked markets, and higher costs of using dollars in that trade make yuan settlement more attractive. Governments then face a choice: repay dollar debt using revenues that are less dollar-linked, default, or restructure into yuan. The paper identifies a liquidity spillover from restructuring: dollar-to-yuan restructurings deepen yuan debt markets, lowering refinancing costs and encouraging additional restructurings. The model shows when fragmentation produces limited restructuring and when it triggers a self-reinforcing shift from dollar debt to yuan debt. A cascade requires the liquidity feedback from yuan restructuring to be stronger than the dispersion in countries' yuan revenue exposure.

Notes:

May 2026.

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