The Long and the Short of it: Sovereign Debt Crises and Debt Maturity

31 Pages Posted: 29 Dec 2014 Last revised: 7 Jan 2015

See all articles by Raquel Fernández

Raquel Fernández

New York University - Leonard N. Stern School of Business, Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Alberto Martin

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2014

Abstract

We present a simple model of sovereign debt crises in which a country chooses its optimal mix of short and long-term bonds subject to standard contracting frictions: the country cannot commit to repay its debts nor to a specific path of future debt issues, and contracts cannot be made state contingent nor renegotiated. We show that, in order to reduce incentives to engage in debt dilution, the country must issue short-term debt. This exposes it to roll-over crises and inefficient repayments. We examine the effects of alternative restructuring regimes, which either write-down debt or extend its maturity in the event of crises, and show that both necessarily improve ex ante welfare if they do not decrease expected payments to creditors during crises. In particular, we show that the way in which these regimes redistribute payments between short- and long-term creditors, which has been a central point in recent policy debates, is inconsequential.

Suggested Citation

Fernández, Raquel and Martin, Alberto, The Long and the Short of it: Sovereign Debt Crises and Debt Maturity (December 2014). NBER Working Paper No. w20786, Available at SSRN: https://ssrn.com/abstract=2543638

Raquel Fernández (Contact Author)

New York University - Leonard N. Stern School of Business, Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Alberto Martin

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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