Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments June 6, 2022 erstellt
Description:
Many countries are incurring record ratios of sovereign debt to GDP. Yet many economists profess little concern, on the grounds that the stock of debt matters far less than the net flow of funds, that low real interest rates testify to lender optimism about long-term sustainability, and that the debt is mostly in fiat currency. The biggest challenge to nonchalance comes from the historical evidence marshalled by Reinhart and Rogoff (2009), who found that high sovereign debt was prone to default and that debt markets typically gave little advance notice. How might we reconcile the two perspectives?This paper develops a simple model in which calm is justified for decades even though default is inevitable long-term. The core insight is that rational debt markets focus mainly on short-term servicing of debt, without distinguishing between rollover and extinction. Rollover bolsters the sovereign’s reputation for servicing without draining real sovereign resources. However, mounting debt gradually raises the perceived risks of default, which in turn raises credit spreads and makes debt mount faster. The pile-on effects are very mild at first. Nevertheless, they eventually accelerate so fast that default becomes inevitable