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We study slow moving debt crises: self-fulfilling equilibria in which high interest rates, due to the fear of a future default, lead to a gradual but faster accumulation of debt, ultimately validating investors' fear. We show that slow moving crises arise in a variety of settings, both when fiscal policy follows a given rule and when it is chosen by an optimizing government. A key assumption, in all these settings, is that the borrowing government cannot commit to issue a fixed amount of bonds in a given period. We discuss how multiplicity is avoided for low debt levels, for sufficiently responsive fiscal policy rules, and for long enough debt maturities. When the equilibrium is unique, debt dynamics are characterized by a tipping point, below which debt falls and stabilizes and above which debt and default rates grow. (JEL E43, E62, H50, H63)

Is the seniority structure of sovereign debt neutral for a government's decision between defaulting and raising surpluses? In this paper, we address this question using a model of debt crises where a discretionary government endogenously chooses distortionary taxation and whether to apply an optimal haircut to bondholders. We show that when the size of senior tranches is small, a version of the Modigliani-Miller theorem holds: tranching just redistributes government revenues from junior to senior bondholders, while taxes and government borrowing costs remain unchanged. However, as senior tranches become sufficiently large, default costs on senior debt transpire into a stronger commitment to repay not only the senior tranche, but also the junior one. We show that there is a lower threshold for senior bonds above which tranching can eliminate default on both junior and senior debt, and an upper threshold beyond which the government defaults also on senior debt. ; The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.

Cover -- Contents -- 1 Introduction -- 2 A bare-bones model of sovereign debt crises -- 2.1 Optimal default and taxation plans under discretion -- 2.2 Debt pricing -- 2.3 Rational expectations equilibrium and regularity conditions -- 2.4 Equilibria -- 3 The effect of tranching when senior debt is riskless -- 3.1 A Modigliani-Miller irrelevance result -- 3.2 Non-neutrality -- 4 Risky senior debt -- 5 A numerical illustration -- 6 Conclusion -- 7 Appendix -- A Proofs of Propositions -- A.1 Proof of Proposition 1 -- A.2 Proof of Proposition 2 -- A.3 Proof of Proposition 3 -- A.4 Proof of Proposition 4 -- B Equilibria under tranching

If global economic justice is to be achieved, debt crises must be assessed within the broader context of the international financial system. This system, which has been largely imposed by a small group of powerful financial agents in the Organization for Economic Cooperation & Development countries, has led to instability & recurrent financial crises that have severely harmed the interests of poor countries & their people. Responsibility for bearing the costs of debt crises & other negative effects of the prevailing international financial system should therefore be assumed by those who have contributed to bringing them about. At present, however, the burden of economic "adjustments" during debt crises has fallen disproportionately on poor debtor nations, & debates regarding debt management have been dominated by individual, corporate, & official creditors. This essay presents the case for institutional reforms that can better protect the human rights of citizens of sovereign debtor nations during debt crises. Adapted from the source document.

The aim of this paper is to assess the short- and medium-term impact of debt crises on GDP. Using an unbalanced panel of 154 countries from 1970 to 2008, the paper shows that debt crises produce significant and long-lasting output losses, reducing output by about 10 percent after eight years. The results also suggest that debt crises tend to be more detrimental than banking and currency crises. The significance of the results is robust to different specifications, identification and endogeneity checks, and datasets

If global economic justice is to be achieved, debt crises must be assessed within the broader context of the international financial system. This system, which has been largely imposed by a small group of powerful financial agents in the Organisation for Economic Co-operation and Development countries, has led to instability and recurrent financial crises that have severely harmed the interests of poor countries and their people. Responsibility for bearing the costs of debt crises and other negative effects of the prevailing international financial system should therefore be assumed by those who have contributed to bringing them about. At present, however, the burden of economic "adjustments" during debt crises has fallen disproportionately on poor debtor nations, and debates regarding debt management have been dominated by individual, corporate, and official creditors. This essay presents the case for institutional reforms that can better protect the human rights of citizens of sovereign debtor nations during debt crises.

Developing country debt crises have been a recurrent phenomenon over the past two centuries. In recent times sovereign debt insolvency crises in developing and emerging economies peaked in the 1980s and, again, from the middle 1990s to the start of the new millennium. Despite the fact that several developing countries now have stronger economic fundamentals than they did in the 1990s, sovereign debt crises will reoccur again. The reasons for this are numerous, but the central one isthat economic fluctuations are inherent features of financial markets, the boom and bust nature of which intensif

Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging market counterparts. The current phase of the official policy approach is predicated on the assumption that debt sustainability can be achieved through a mix of austerity, forbearance and growth. The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital control