Discussion Paper Details

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Title: Sovereign Debt in the 21st Century: Looking Backward, Looking Forward

Author(s): Kris James Mitchener and Christoph Trebesch

Publication Date: March 2021

Keyword(s): Bailouts, bank-sovereign doom loops, Eurozone Debt Crisis, official creditors, self-fulfilling crisis dynamics and Sovereign debt

Programme Area(s): Economic History and International Macroeconomics and Finance

Abstract: How will sovereign debt markets evolve in the 21st century? We survey how the literature has responded to the eurozone debt crisis, placing "lessons learned" in historical perspective. The crisis featured: (i) the return of debt problems to advanced economies; (ii) a bank-sovereign "doom-loop" and the propagation of sovereign risk to households and firms; (iii) roll-over problems and self-fulfilling crisis dynamics; (iv) severe debt distress without outright sovereign defaults; (v) large-scale "sovereign bailouts" from abroad; and (vi) creditor threats to litigate and hold out in a debt restructuring. Many of these characteristics were already present in historical debt crises and are likely to remain relevant in the future. Looking forward, our survey points to a growing role of sovereign-bank linkages, legal risks, domestic debt and default, and of official creditors, due to new lenders such as China as well as the increasing dominance of central banks in global debt markets. Questions of debt sustainability and default will remain acute in both developing and advanced economies.

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Bibliographic Reference

Mitchener, K and Trebesch, C. 2021. 'Sovereign Debt in the 21st Century: Looking Backward, Looking Forward'. London, Centre for Economic Policy Research.