EIB Working Paper 2026/04 - Sovereign debt dynamics at the brink of default and the special role of supranational lenders
This paper studies why it is often hard to judge whether a country’s public debt is sustainable. We show that defaults aren’t driven solely by the underlying economy, but also by expectations among lenders—especially in times of crisis. Using a stylised economic model, we explain when governments ac...
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| Format: | Online |
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| Jezik: | angleščina |
| Izdano: |
European Investment Bank
2026
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| Teme: | |
| Online dostop: | ONIX_20260529T115620_9789286161667_5 |
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| Izvleček: | This paper studies why it is often hard to judge whether a country’s public debt is sustainable. We show that defaults aren’t driven solely by the underlying economy, but also by expectations among lenders—especially in times of crisis. Using a stylised economic model, we explain when governments act cautiously and when they take risks, why the debt maturity profile matters, and how lenders’ beliefs can structurally limit the available financing provided by the market. We also examine the role of international institutions that lend money to countries. We find that when their financial support is well designed, it can prevent crises and compensate for the shortage of private lending. At the same time, financial markets still encourage governments to keep their budgets under control. |
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