Sovereign Credit Risk and Banking Crises

Manuel Mayer

Publikation: Working/Discussion PaperWorking Paper/Preprint


This paper develops a structural model for the valuation of sovereign debt in which a sovereign country with a fragile financial sector faces a strategic default decision under the risk of experiencing a banking crisis. The optimal default policy is
governed by the trade-off between lower debt servicing expenditures and the costs of sovereign default represented by reductions in foreign trade as well as increased financial stress for the local banking sector. The framework developed in this paper
yields new insights into the interaction between sovereign risk and financial sector characteristics such as the relative size of the banking sector within the sovereign s
economy, aggregate financial sector credit risk, and bank bond holdings of public debt.
PublikationsstatusVeröffentlicht - 1 Dez. 2011