On the Sovereign Debt Paradox

Victor Filipe Martins da Rocha (1, 2) , Yiannis Vailakis (3)

1 EESP - Sao Paulo School of Economics
2 CEREMADE - CEntre de REcherches en MAthématiques de la DEcision
3 Adam Smith Business School

Bulow and Rogoff (1989) showed that lending to small countries cannot be supported merely on the country's "reputation for repayment" if exclusion from future credit mar-kets is the only consequence of default. Their arguments are valid under fairly general conditions but they do not go through when the output of the sovereign may vanish along a path of successive low productivity shocks, or when it may grow unboundedly along a path of successive high productivity shocks. We propose an alternative proof illustrating that their renowned sovereign debt paradox holds in full generality.

Mots clés: Sovereign Risk; Lack of Commitment; Reputation Debt

Domaines: Economies et finances

Victor Filipe Martins da Rocha, Yiannis Vailakis. On the Sovereign Debt Paradox. 2014. ⟨hal-01097118v1⟩