TY - JOUR
T1 - Sovereign debt renegotiation and credit default swaps
AU - Salomao, Juliana
N1 - Publisher Copyright:
© 2017 Elsevier B.V.
PY - 2017/10
Y1 - 2017/10
N2 - A credit default swap (CDS) contract provides insurance against default. This paper incorporates the contract into a sovereign default model and demonstrates that the existence of a CDS market results in lower default probability, higher debt levels, and lower financing costs for the country. Uncertainty over the insurance payout when the debt is renegotiated explains why in the data, as the output declines, the CDS spread becomes lower than the bond spread. Finally, my results show that the 2012 CDS naked ban, that decreased the levels of CDS for European countries, is a welfare reducing policy.
AB - A credit default swap (CDS) contract provides insurance against default. This paper incorporates the contract into a sovereign default model and demonstrates that the existence of a CDS market results in lower default probability, higher debt levels, and lower financing costs for the country. Uncertainty over the insurance payout when the debt is renegotiated explains why in the data, as the output declines, the CDS spread becomes lower than the bond spread. Finally, my results show that the 2012 CDS naked ban, that decreased the levels of CDS for European countries, is a welfare reducing policy.
KW - Credit default swaps
KW - Debt renegotiation
KW - Naked ban
KW - Negative basis
KW - Sovereign default
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U2 - 10.1016/j.jmoneco.2017.06.005
DO - 10.1016/j.jmoneco.2017.06.005
M3 - Article
AN - SCOPUS:85022194837
SN - 0304-3932
VL - 90
SP - 50
EP - 63
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
ER -
