Goderis, Benedikt and Wagner, Wolf (2009): Credit Derivatives and Sovereign Debt Crises.
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Credit derivatives allow for buying protection on corporate debt, but also on sovereign debt. In this paper we examine the implications for sovereign debt crises. We show that the availability of credit protection lowers ex-ante debtor moral hazard by allowing a bondholder to improve his bargaining position in negotiations with the sovereign, thus forcing the sovereign to internalize more of the costs of a crisis. When bondholders use credit protection strategically, we additionally find that credit derivatives do not hinder an efficient resolution of crises. Crisis resolution may even be improved by facilitating conditionality. When protection is not chosen strategically, however, credit protection may also be detrimental to crisis resolution by making restructuring more difficult. In either case we identify a role for government policy as bondholders' choice of protection is not necessarily socially efficient.
|Item Type:||MPRA Paper|
|Original Title:||Credit Derivatives and Sovereign Debt Crises|
|English Title:||Credit Derivatives and Sovereign Debt Crises|
|Keywords:||credit derivatives, sovereign debt crisis, moral hazard|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems
F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions
|Depositing User:||Benedikt Goderis|
|Date Deposited:||16. Sep 2009 14:12|
|Last Modified:||15. Feb 2013 11:06|
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