Working Paper: CEPR ID: DP9562
Authors: Harris Dellas; Dirk Niepelt
Abstract: We develop a sovereign debt model with official and private creditors where default risk depends on both the level and the composition of liabilities. Higher exposure to official lenders improves incentives to repay but carries extra costs, such as reduced ex-post flexibility. The model implies that official lending to sovereigns takes place in times of debt distress; carries a favorable rate; and can displace private funding even under pari passu provisions. Moreover, in the presence of long-term debt overhang, the availability of official funds increases the probability of default on existing debt, although default does not trigger exclusion from private credit markets. These findings help shed light on joint default and debt composition choices of the type observed during the recent sovereign debt crisis in Europe.
Keywords: sovereign debt; official lending; default; enforcement
JEL Codes: F34; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher exposure to official lenders (F65) | improved incentives to repay sovereign debt (F34) |
| higher exposure to official lenders (F65) | reduced default risk (G33) |
| availability of official funds (E50) | increased probability of default on existing debt (G33) |
| official funds (G23) | enhanced repayment incentives (O31) |