Open Lecture "Sovereign debt issuance and selective default"

Author: Kirill Shakhnov, PhD (European University Institute)
Topic: Sovereign debt issuance and selective default
Date and time: July 20, 16:00 - 18:00
Place: IPM Business School
Working language: English.


In the course of the lecture Kirill Shakhnov presented his paper "Sovereign debt issuance and selective default". The authors proposed a novel theory to explain why sovereigns borrow on both domestic and international markets and why defaults are mostly selective (on either domestic or foreign investors). Domestic debt issuance can only smooth tax distortion shocks, whereas foreign debt can also smooth productivity shocks. If the correlation of these shocks is sufficiently low, the sovereign borrows on both markets to avoid excess consumption volatility. Defaults on both types of investors arise in equilibrium due to market incompleteness and the government’s limited commitment. The model matches business cycle moments and frequencies of different types of defaults in emerging economies. The authors also found, contrary to existing contributions, that secondary markets are not a sufficient condition to avoid sovereign defaults. The outcome of the trade in bonds on secondary markets depends on how well each group of investors can coordinate their actions.