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Classic analyses of sovereign debt make no predictions concerning the allocation of risk between the market and the official sector or among official sector creditors. To open the black box of the composition of a sovereign's foreign liabilities, this paper develops a new framework and distinguishes between ``ex-post solidarity'', aimed at avoiding collateral damages inflicted by a distressed country's default, and ``contractual solidarity'', illustrated by joint-and-several liability or lines of credit, that creates formal modes of insurance. When countries differ substantially in their probability of distress, the optimal mechanism takes the form of a debt brake together with mixed public-private financing for the weaker country; no joint liability emerges. By contrast, in a more symmetrical, mutual-insurance context, contractual solidarity in the form of joint liability is optimal provided that country shocks are sufficiently independent and spillovers costs sufficiently large relative to default costs. Joint liability increases both borrowing capability and the risk of contagion. Spillovers, when endogenized, are larger under mutual insurance than under one-way insurance. Finally, the paper considers the possibility of debt monetization, comparing the outcomes under a currency union and an own currency. It studies whether a currency area is more conducive to bailouts and whether bailouts are optimally denominated in domestic or foreign currency.

Mots clefs

Sovereign debt, joint liability, bailouts, contagion, private sector involvement, debt monetization

Codes JEL

E62 : Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
F34 : International Lending and Debt Problems
H63 : Debt; Debt Management

Groupes thématiques TSE

Economie publique