Working Paper: CEPR ID: DP15935
Authors: kris james mitchener; christoph trebesch
Abstract: How will sovereign debt markets evolve in the 21st century? We survey how the literature has responded to the eurozone debt crisis, placing “lessons learned” in historical perspective. The crisis featured: (i) the return of debt problems to advanced economies; (ii) a bank-sovereign “doom-loop” and the propagation of sovereign risk to households and firms; (iii) roll-over problems and self-fulfilling crisis dynamics; (iv) severe debt distress without outright sovereign defaults; (v) large-scale “sovereign bailouts” from abroad; and (vi) creditor threats to litigate and hold out in a debt restructuring. Many of these characteristics were already present in historical debt crises and are likely to remain relevant in the future. Looking forward, our survey points to a growing role of sovereign-bank linkages, legal risks, domestic debt and default, and of official creditors, due to new lenders such as China as well as the increasing dominance of central banks in global debt markets. Questions of debt sustainability and default will remain acute in both developing and advanced economies.
Keywords: sovereign debt; eurozone debt crisis; bank-sovereign doom loops; bailouts; self-fulfilling crisis dynamics; official creditors
JEL Codes: f30; f34; g12; g15; n10; n20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| eurozone debt crisis (H12) | advanced economies debt problems (F34) |
| bank-sovereign doom loop (F65) | economic downturns (F44) |
| market expectations (D84) | actual economic outcomes (F69) |
| external financial assistance (F35) | stabilization of sovereign debt markets (H63) |
| legal risks (K13) | sovereign debt sustainability (H63) |
| domestic debt (H63) | default risks (G33) |