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Default-risky Sovereign Debt

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  • Wiggers, Andreas

Abstract

Not only corporate but also sovereign debtors, in particular developing countries, may get into financial difficulties. Contrary to corporate issuers, they decide themselves if they continue to fulfill their debt obligations or convert their debt. I analyze the value of a default-risky sovereign bond in a setting in which foreign trade is reduced in case the country does not fulfill its obligations. Comparing the costs of debt service with the value of the punishment via foreign trade, the country voluntarily decides when to reorganize its debt. Knowing this threshold the value of a sovereign coupon-bond can be calculated.

Suggested Citation

  • Wiggers, Andreas, 2002. "Default-risky Sovereign Debt," Bonn Econ Discussion Papers 36/2002, University of Bonn, Bonn Graduate School of Economics (BGSE).
    • Handle: RePEc:zbw:bonedp:362002
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    File URL: https://www.econstor.eu/bitstream/10419/22857/1/bgse36_2002.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Katia Rocha & Francisco A. Alcaraz Garcia, 2015. "The Term Structure of Sovereign Spreads in Emerging Markets: a Calibration Approach for Structural Models," Discussion Papers 0135, Instituto de Pesquisa Econômica Aplicada - IPEA.
    2. Yap Chee Jin & Gannon Gerard, 2011. "Announcement Effect on the Credit Spreads of US Dollar Malaysian Bonds," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 14(03), pages 449-484.
    3. Rocha, Katia & Alcaraz Garcia, Francisco Augusto & Teixeira, José Paulo, 2007. "Term Structure of Sovereign Spreads - A Contingent Claim Model," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 61(4), July.

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    More about this item

    Keywords

    Credit risk; sovereign debt; endogenous default;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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