TY  - UNPD
A1  - Achury, Carolina
A1  - Koulovatianos, Christos
A1  - Tsoukalas, John D.
T1  - Political economics of external sovereign defaults
T2  - Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 508
N2  - We develop a dynamic recursive model where political and economic decisions interact, to study how excessive debt-GDP ratios affect political sustainability of prudent fiscal policies. Rent seeking groups make political decisions – to cooperate (or not) – on the allocation of fiscal budgets (including rents) and issuance of sovereign debt. A classic commons problem triggers collective fiscal impatience and excessive debt issuing, leading to a vicious circle of high borrowing costs and sovereign default. We analytically characterize debt-GDP thresholds that foster cooperation among rent seeking groups and avoid default. Our analysis and application helps in understanding the politico-economic sustainability of sovereign rescues, emphasizing the need for fiscal targets and possible debt haircuts. We provide a calibrated example that quantifies the threshold debt-GDP ratio at 137%, remarkably close to the target set for private sector involvement in the case of Greece.
T3  - CFS working paper series - 508 
KW  - sovereign debt
KW  - rent seeking
KW  - world interest rates
KW  - international lendin
KW  - incentive compatibility
KW  - tragedy of the commons
KW  - EU crisis
KW  - Grexit
KW  - Graccident
Y1  - 2015
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/38278
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-382782
UR  - http://ssrn.com/abstract=2631418
IS  - July 2, 2015
PB  - Center for Financial Studies
CY  - Frankfurt, M.
ER  -