Paper #998

Title:

Sovereign risk and secondary markets

Authors:

Fernando Broner, Alberto Martin and Jaume Ventura

Date:

December 2006 (Revised: August 2009)

Abstract:

Conventional wisdom views the problem of sovereign risk as one of insufficient penalties. Foreign creditors can only be repaid if the government enforces foreign debts. And this will only happen if foreign creditors can effectively use the threat of imposing penalties to the country. Guided by this assessment of the problem, policy prescriptions to reduce sovereign risk have focused on providing incentives for governments to enforce foreign debts. For instance, countries might want to favor increased trade ties and other forms of foreign dependence that make them vulnerable to foreign retaliation thereby increasing the costs of default penalties.

Keywords:

Sovereign risk, secondary markets, default penalties, commitment, international risk sharing, international borrowing

JEL codes:

F34, F36, G15

Area of Research:

Macroeconomics and International Economics

Published in:

American Economic Review, 100 (4), 1523-1555, 2010

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