Sovereign default

Question 1

Sovereign default

Defnition

Answer 1

When a government fails to do the intrest payment on the due date

Question 2

Difference sovereign and corporate defaulr

2 differences

Answer 2

1. Ability vs willingness to repay
2. Law enforceability: international contracts, gunboat diplomacy

Question 3

Why do countries default?

Answer 3

Too costly to repay debt even though they have ability

Question 4

Why do countreis repay?

Answer 4

To keep good financial standing/acces to financial market

Question 5

Why do investors lend to the government?

Answer 5

They recieve a risk premium for the risk of defaulting

Question 6

Eaton-Gersovitz model

Answer 6

Consider small open economy
Endowment yt
Infinite number of periods

Question 7

Preferences in Eaton-Gersovitz model

Answer 7

Expected som of bèta^t u(ct)

bèta: discount factor
ct: consumption in period t

Question 8

Good financial standing

Country can save and borrow: debt limit d

Answer 8

Descision to repay old debt and keep acces
Default and get bad financial standing

If repay –> can issue new debt d t+1 < d streep at price q t

q t is determinied by financial market

Question 9

Bad financial standing

No acces to financial market and stay here

Answer 9

Have output loss: gamma yt
-Trade disruption - no trade credit
- Inefficiency in production - no imported inputs