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Sovereign debt crises: models and policy

Schuman Centre's Seminar Series

Add to calendar 2022-10-12 16:30 2022-10-12 18:00 Europe/Rome Sovereign debt crises: models and policy Online Zoom YYYY-MM-DD


12 October 2022

16:30 - 18:00 CEST




This seminar will feature a presentation by Giancarlo Corsetti, Pierre Werner Chair and Professor of Economics at the EUI.

After the global financial crisis, the average public debt to gross domestic product ratio in advanced countries rose from below 80 percent to well above 100 percent at the end of 2008. After 2020, the global distress of the COVID-19 pandemic is sparking a further hike in this ratio, expected to end up substantially higher and raise a host of issues in financial and macroeconomic stability. The academic and policy literature has long reflected on the possibility that countries with relatively high debt face disruptive belief-driven turmoil in the sovereign bond market. This may take the form of hikes in the borrowing costs that raise deficits and feed unsustainable debt dynamics with a (slow) build-up of liabilities eventually leading to default. It may also coincide with a sudden stop of market financing, where default is immediate in the face of a (fast) rollover crisis.

In the talk, Giancarlo Corsetti will discuss the theory of debt sustainability, through the lens of a stylised, tractable model that accounts for the variety of crises we observe in history, and suitable to address key open issues in theory and policy. Namely, sovereign risk (slow) and rollover (fast) crises appear to be pervasive in the data: under what conditions sovereigns may face hikes in borrowing costs, as opposed to losing market access, due to market beliefs coordinating on a "bad equilibrium"? In particular, would lengthening the debt maturity an effective way to shield countries from these adverse scenarios? Second, and most crucially, is the threat of belief-driven crises enough to motivate optimal deleveraging even when the economy is in a downturn as opposed to borrowing more, gambling on a future economic recovery?

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