Handbook of Safeguarding Global Financial Stability

Chapter 20

Theory of Sovereign Debt and Default

Mark L.J. Wright

Federal Reserve Bank of Chicago, Chicago, IL, USA, University of California, Los Angeles, CA, USA

National Bureau of Economic Research, Cambridge, MA, USA

Outline

Introduction

Why Do Countries Repay Their Debts?

Sovereign Immunity, Legal Sanctions, and Direct Punishments

Restrictions on Financial Market Access

Domestic Costs of Default

Why Do Countries Borrow So Much?

A Benchmark Model

Evaluating and Extending the Benchmark Model

Policy and Welfare

Rollover Risk and Self-Fulfilling Debt Crises

Debt Dilution and the Maturity of Sovereign Debts

Collective Action Problems in Debt Restructuring

Conclusion

Glossary

Further Reading

Introduction

The absence of a supranational legal system ...