Aitor Erce's Books

Costs of Sovereign Defaults: Restructuring Strategies, Bank Distress and the Capital Inflow-Credit Channel

By: Mr.Tamon Asonuma,Mr.Marcos d Chamon,Aitor Erce,Akira Sasahara

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Costs of Sovereign Defaults: Restructuring Strategies, Bank Distress and the Capital Inflow-Credit Channel

By: Mr.Tamon Asonuma,Mr.Marcos d Chamon,Aitor Erce,Akira Sasahara

Sovereign debt restructurings are associated with declines in GDP, investment, bank credit, and capital flows. The transmission channels and associated output and banking sector costs depend on whether the restructuring takes place preemptively, without missing payments to creditors, or whether it takes place after a default has occurred. Post-default restructurings are associated with larger declines in bank credit, an increase in lending interest rates, and a higher likelihood of triggering a banking crisis than pre-emptive restructurings. Our local projection estimates show large declines in GDP, investment, and credit amplified by severe sudden stops and transmitted through a “capital inflow-credit channel”.

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International Monetary Fund

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ISBN 10

1498304966

ISBN 13

9781498304962

Sovereign Debt Markets in Turbulent Times

Creditor Discrimination and Crowding-Out

By: Fernando Broner,Aitor Erce,Alberto Martin,Jaume Ventura

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Sovereign Debt Markets in Turbulent Times

Creditor Discrimination and Crowding-Out

By: Fernando Broner,Aitor Erce,Alberto Martin,Jaume Ventura

In 2007, countries in the Euro periphery were enjoying stable growth, low deficits, and low spreads. Then the financial crisis erupted and pushed them into deep recessions, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private to the public sectors, reducing investment and deepening the recessions even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the Eurozone, and how they may be addressed by policies at the European level.

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