Financial system

Linguistics

Non-performing loan

Default

Philosophy

Interest rate

Sovereignty

Government (linguistics)

Economics

Sovereign default

Business

Sovereign debt

Politics

Political science

Monetary economics

Debt

Loan

Financial economics

Finance

Government debt

Journal of Monetary Economics

Sovereign defaults feature three key empirical regularities regarding the domestic banking systems: (i) defaults and banking crises happen together, (ii) banks are largely exposed to government debt, (iii) defaults trigger major contractions in bank credit and production. We rationalize these phenomena by extending a traditional default framework to incorporate bankers who lend to both government and firms. When bankers are exposed to government debt, a default generates a banking crisis, which triggers collapses in corporate credit and output. Calibrated to the 2001-02 Argentine default, the model produces equilibrium crises at observed frequencies, sharp credit contractions, and output drops of 7%.

Sovereign defaults and banking crises