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Cover; Fragmented Politics and Public Debt; 1. Introduction; 2. Literature Review; 3. Empirical Model and Data; 4. Main Results; 5. Robustness tests; 6. Concluding remarks and policy implications; Appendix 1. Countries in the Sample; Appendix 2. Other Results; References.

This paper develops and empirically tests a political economy model of sovereign debt. The main incentive for repaying sovereign debt is to maintain access to international capital markets. However, in a democracy, one generation may choose default regardless of its consequences for future generations. An old generation with little concern for its country's access to capital markets can force a default on debt if it has the majority of voters. On the other hand, if the younger generation is more numerous, it can force repayment of previously defaulted debt. Other voter heterogeneities, such as

"The authors quantify gains from introducing non-defaultable debt as a limited additional financing option into a model of equilibrium sovereign risk. They find that, for an initial (defaultable) sovereign debt level equal to 66 percent of trend aggregate income and a sovereign spread of 2.9 percent, introducing the possibility of issuing non-defaultable debt for up to 10 percent of aggregate income reduces immediately the spread to 1.4 percent, and implies a welfare gain equivalent to a permanent consumption increase of 0.9 percent. The spread reduction would be only 0.1 (0.2) percentage points higher if the government uses nondefaultable debt to buy back (finance a 'voluntary' debt exchange for) previously issued defaultable debt. Without restrictions to defaultable debt issuances in the future, the spread reduction achieved by the introduction of non-defaultable debt is short lived. They also show that allowing governments in default to increase non-defaultable debt is damaging at the time non-defaultable debt is introduced and inconsequential in the medium term. These findings shed light on different aspects of proposals to introduce common euro-area sovereign bonds that could be virtually non-defaultable."--Abstract

Cover -- Contents -- 1 Introduction -- 2 A model of systemic sovereign debt crises -- 2.1 Model structure -- 2.2 Financing needs are met and production continues -- 2.3 Financing needs are not met and capital is liquidated -- 2.4 Welfare definitions and equilibrium interest rate -- 3 Laissez-faire equilibrium -- 3.1 Complete financial markets -- 3.2 Incomplete financial markets -- 4 Crisis-resolution frameworks for IFIs -- 4.1 Planner's solution without official transfers -- 4.2 Planner's solution with official transfers, but no commitment -- 4.3 Planner's solution with official transfers and commitment -- 4.4 Welfare implications of alternative crisis-resolution frameworks -- 5 Conclusion -- Appendices -- A: Derivation of the laissez-faire equilibrium -- A.1 Complete financial markets -- A.2 Incomplete financial markets -- B: Derivation of the planner's solution -- B.1 Without commitment -- B.2 With commitment -- C: Constant interest rate.

Several models establish a positive association between public debt ratios and long-term real yields, but the empirical evidence is not always conclusive. We reconsider this issue, focusing in particular on possible spillover effects of large advanced economies' debt levels to other economies' borrowing yields, especially in emerging markets. We extend the existing literature by using real time expectations of fiscal and other macroeconomic variables for a large sample of advanced and emerging economies. We show that an increase in the public debt levels of large advanced economies - especiall

High public debt often produces the drama of default and restructuring. But debt is alsoreduced through financial repression, a tax on bondholders and savers via negative or belowmarketreal interest rates. After WWII, capital controls and regulatory restrictions created acaptive audience for government debt, limiting tax-base erosion. Financial repression is mostsuccessful in liquidating debt when accompanied by inflation. For the advanced economies,real interest rates were negative ½ of the time during 1945-1980. Average annual interestexpense savings for a 12-country sample range from about

Using a novel empirical approach and an extensive dataset developed by the Fiscal Affairs Department of the IMF, we find no evidence of any particular debt threshold above which medium-term growth prospects are dramatically compromised. Furthermore, we find the debt trajectory can be as important as the debt level in understanding future growth prospects, since countries with high but declining debt appear to grow equally as fast as countries with lower debt. Notwithstanding this, we find some evidence that higher debt is associated with a higher degree of output volatility

The aim of this paper is to assess the short- and medium-term impact of debt crises on GDP. Using an unbalanced panel of 154 countries from 1970 to 2008, the paper shows that debt crises produce significant and long-lasting output losses, reducing output by about 10 percent after eight years. The results also suggest that debt crises tend to be more detrimental than banking and currency crises. The significance of the results is robust to different specifications, identification and endogeneity checks, and datasets

Delegating fiscal decision making power to sub-national governments has been an area ofinterest for both academics and policymakers given the expectation that it may lead to betterand more efficient provision of public goods and services. Decentralization has, however,often occurred on the expenditure and less on the revenue side, creating "vertical fiscalimbalances" where sub-national governments' expenditures are not financed through theirown revenues. The mismatch between own revenues and expenditures may haveconsequences for public finance performance. This study constructs a large sample

Emerging countries that have defaulted on their debt repayment obligations in the past are more likely to default again in the future than are non-defaulters even with the same external debt-to-GDP ratio. These countries actually have repeated defaults or restructurings in short periods. This paper explains these stylized facts within a dynamic stochastic general equilibrium framework by explicitly modeling renegotiations between a defaulting country and its creditors. The quantitative analysis of the model reveals that the equilibrium probability of default for a given debt-to-GDP level is weakly increasing with the number of past defaults. The model also accords with an additional fact: lower recovery rates (high NPV haircuts) are associated with increases in spreads at renegotiation.--Abstract

We study the relationship between default and the maturity structure of the debt portfolio of a Sovereign, under uncertainty. The Sovereign faces a trade-off between a future costly default and a high current fiscal effort. This results into a debt crisis in case a large initial issuance of long term debt is followed by a sequence of negative macro shocks. Prior uncertainty about future fundamentals is then a source of default through its effect on long term interest rates and the optimal debt issuance. Intuitively, the Sovereign chooses a portfolio implying a risk of default because this risk generates a correlation between the future value of long term debt and future fundamentals. Long term debt serves as a hedging instrument against the risk on fundamentals. When expected fundamentals are high, the Sovereign issues a large amount of long term debt, the expected default probability increases, and so does the long term interest rate.--Abstract

Contrary to widespread expectation, debt renegotiations in the era of bond finance have generally been quick and involved little litigation. We present a model that rationalizes the initial fears and offers interpretations for why they did not materialize. When the exchange offer is sufficiently attractive vis-à-vis holding out, full participation can be an equilibrium. Legal innovations such as minimum participation thresholds and defensive exit consents helped coordinate creditors and avoid litigation. Unlike CACs, exit consents can be exploited to force high haircuts on creditors, but the a

This volume analyze the impact of sustained lower productivity growth on public finances, social protection, trade, capital flows, wages, and inequality. It concludes that slow productivity growth could aggravate inequality and increase concentration of market power and also proposes ways that countries can cope with these consequences