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Non-defaultable debt and sovereign risk

Juan Carlos Hatchondo, Leonardo Martinez and Yasin Kursat Önder (UGent)
(2017) JOURNAL OF INTERNATIONAL ECONOMICS. 105. p.217-229
Author
Organization
Abstract
We quantify gains from introducing limited financing through non-defaultable debt into a model of equilibrium sovereign risk. For an initial sovereign spread of 4.2%, introducing the possibility of issuing non-defaultable debt for up to 10% of aggregate income reduces immediately the spread to 1.5%, and implies a welfare gain equivalent to a permanent consumption increase of 0.8%. Nevertheless, the spread reduction achieved by the introduction of non-defaultable debt is short lived. Our findings shed light on different aspects of proposals to introduce common euro-area sovereign bonds that could be virtually non-defaultable. (C) 2017 International Monetary Fund. Published by Elsevier B.V. All rights reserved.
Keywords
Sovereign default, Sovereign debt, Eurobonds, Red bonds, Blue bonds, Buyback, Voluntary debt exchange, Common euro-area sovereign bonds, BUSINESS CYCLES, MATURITY, MODEL

Citation

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MLA
Hatchondo, Juan Carlos, et al. “Non-Defaultable Debt and Sovereign Risk.” JOURNAL OF INTERNATIONAL ECONOMICS, vol. 105, 2017, pp. 217–29, doi:10.1016/j.jinteco.2017.01.008.
APA
Hatchondo, J. C., Martinez, L., & Önder, Y. K. (2017). Non-defaultable debt and sovereign risk. JOURNAL OF INTERNATIONAL ECONOMICS, 105, 217–229. https://doi.org/10.1016/j.jinteco.2017.01.008
Chicago author-date
Hatchondo, Juan Carlos, Leonardo Martinez, and Yasin Kursat Önder. 2017. “Non-Defaultable Debt and Sovereign Risk.” JOURNAL OF INTERNATIONAL ECONOMICS 105: 217–29. https://doi.org/10.1016/j.jinteco.2017.01.008.
Chicago author-date (all authors)
Hatchondo, Juan Carlos, Leonardo Martinez, and Yasin Kursat Önder. 2017. “Non-Defaultable Debt and Sovereign Risk.” JOURNAL OF INTERNATIONAL ECONOMICS 105: 217–229. doi:10.1016/j.jinteco.2017.01.008.
Vancouver
1.
Hatchondo JC, Martinez L, Önder YK. Non-defaultable debt and sovereign risk. JOURNAL OF INTERNATIONAL ECONOMICS. 2017;105:217–29.
IEEE
[1]
J. C. Hatchondo, L. Martinez, and Y. K. Önder, “Non-defaultable debt and sovereign risk,” JOURNAL OF INTERNATIONAL ECONOMICS, vol. 105, pp. 217–229, 2017.
@article{01GQ4MQS171SZ2A95GQAD2TRMA,
  abstract     = {{We quantify gains from introducing limited financing through non-defaultable debt into a model of equilibrium sovereign risk. For an initial sovereign spread of 4.2%, introducing the possibility of issuing non-defaultable debt for up to 10% of aggregate income reduces immediately the spread to 1.5%, and implies a welfare gain equivalent to a permanent consumption increase of 0.8%. Nevertheless, the spread reduction achieved by the introduction of non-defaultable debt is short lived. Our findings shed light on different aspects of proposals to introduce common euro-area sovereign bonds that could be virtually non-defaultable. (C) 2017 International Monetary Fund. Published by Elsevier B.V. All rights reserved.}},
  author       = {{Hatchondo, Juan Carlos and  Martinez, Leonardo and Önder, Yasin Kursat}},
  issn         = {{0022-1996}},
  journal      = {{JOURNAL OF INTERNATIONAL ECONOMICS}},
  keywords     = {{Sovereign default,Sovereign debt,Eurobonds,Red bonds,Blue bonds,Buyback,Voluntary debt exchange,Common euro-area sovereign bonds,BUSINESS CYCLES,MATURITY,MODEL}},
  language     = {{eng}},
  pages        = {{217--229}},
  title        = {{Non-defaultable debt and sovereign risk}},
  url          = {{http://doi.org/10.1016/j.jinteco.2017.01.008}},
  volume       = {{105}},
  year         = {{2017}},
}
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