Publication

This paper describes the problem facing countries that cannot print the currency in which their debts are denominated, as is the case in the eurozone. The author presents a model with two types of sovereign default cost, which implies that under certain conditions it might make sense for creditors to forgive part of a country’s debt to avoid it choosing to default and thereby paying even less. The model exhibits a potential for multiple equilibria, given that a higher interest rate charged by investors increases the debt service burden and thus the temptation to default.