Economics of Sovereign Debt

Edited by Robert W. Kolb, Professor of Finance and Frank W. Considine Chair of Applied Ethics, Quinlan School of Business, Loyola University Chicago, US

• Contents:Volume IResearch ReviewRobert W. KolbPART ITHE THEORY OF SOVEREIGN DEBT 1. Robert J. Barro (1974), ‘Are Government Bonds Net Wealth?’, Journal of Political Economy, 82 (6), November–December, 1095–1172. Robert J. Barro (1979), ‘On the Determination of the Public Debt’, Journal of Political Economy, 87 (5, Part 1), October, 940–713. Martin Feldstein (1985), ‘Debt and Taxes in the Theory of Public Finance’, Journal of Public Economics, 28 (2), November, 233–454. Jonathan Eaton and Mark Gersovitz (1981), ‘Debt with Potential Repudiation: Theoretical and Empirical Analysis’, Review of Economic Studies, XLVII (2), April, 289–3095. Jonathan Eaton, Mark Gersovitz and Joseph E. Stiglitz (1986), ‘The Pure Theory of Country Risk’, European Economic Review, 30 (3), June, 481–5136. Herschel I. Grossman and John B. Van Huyck, (1988), ‘Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation’, American Economic Review, 78 (5), December, 1088–977. Jeremy Bulow and Kenneth Rogoff (1989), ‘Sovereign Debt: Is to Forgive to Forget?’, American Economic Review, 79 (1), March, 43–508. Jeremy Bulow and Kenneth Rogoff (1989), ‘A Constant Recontracting Model of Sovereign Debt’, Journal of Political Economy, 97 (1), February, 155–789. Harold L. Cole and Patrick J. Kehoe (1998), ‘Models of Sovereign Debt: Partial Versus General Reputations’, International Economic Review, 39 (1), February, 55–7010. Kenneth M. Kletzer and Brian D. Wright (2000), ‘Sovereign Debt as Intertemporal Barter’, American Economic Review, 90 (3), June, 621–39PART II SOVEREIGN DEBT BEFORE THE MODERN STATE 11. John M. Veitch (1986), ‘Repudiations and Confiscations by the Medieval State’, Journal of Economic History, 46 (1), March, 31–612. J. Bradford De Long and Andrei Shleifer (1993), ‘Princes and Merchants: European City Growth Before the Industrial Revolution’, Journal Of Law and Economics, XXXVI (2), October, 671–70213. James Conklin (1998), ‘The Theory of Sovereign Debt and Spain under Philip II’, Journal of Political Economy, 106 (3), June, 483–51314. Mauricio Drelichman and Hans-Joachim Voth (2010), ‘The Sustainable Debts of Philip II: A Reconstruction of Castile’s Fiscal Position, 1566–1596’, Journal of Economic History, 70 (4), December, 813–4215. Mauricio Drelichman and Hans-Joachim Voth (2011), ‘Lending to the Borrower from Hell: Debt and Default in the Age of Philip II’, Economic Journal, 121 (557), December, 1205–27, technical appendix16. Mauricio Drelichman and Hans-Joachim Voth (2011), ‘Serial Defaults, Serial Profits: Returns to Sovereign Lending in Habsburg Spain, 1566–1600’, Explorations in Economic History, 48 (1), January, 1–19 17. Mauricio Drelichman and Hans-Joachim Voth (2015), ‘Risk Sharing with the Monarch: Contingent Debt and Excusable Defaults in the Age of Philip II, 1556–1598’, Cliometrica, 9 (1), January, 49–7518. Earl J. Hamilton (1947), ‘Origin and Growth of the National Debt in Western Europe’, American Economic Review, 37 (2), May, 118–3019. David R. Weir (1989), ‘Tontines, Public Finance, and Revolution in France and England, 1688–1789’, Journal of Economic History, 49 (1), March, 95–124PART III POLITICAL INSTITUTIONS AND SOVEREIGN DEBT 20. Douglass C. North and Barry R. Weingast (1989), ‘Constitutions and Commitment: The Evolution of Institutional Governing Public Choice in Seventeenth-Century England’, Journal of Economic History, XLIX (4), December, 803–3221. David Stasavage (2002), ‘Credible Commitment in Early Modern Europe: North and Weingast Revisited’, Journal of Law Economics and Organization, 18 (1), April, 155–8622. Kenneth A. Schultz and Barry R. Weingast (2003), ‘The Democratic Advantage: Institutional Foundations of Financial Power in International Competition’, International Organization, 57 (1), Winter, 3–4223. Sebastian M. Saiegh (2005), ‘Do Countries Have a “Democratic Advantage”?: Political Institutions, Multilateral Agencies, and Sovereign Borrowing’, Comparative Political Studies, 38 (4), May, 366–8724. David Stasavage (2007), ‘Cities, Constitutions, and Sovereign Borrowing in Europe, 1274–1785’, International Organization, 61 (3), July, 489–52525. Candace C. Archer, Glen Biglaiser and Karl DeRouen Jr. (2007), ‘Sovereign Bonds and the “Democratic Advantage”: Does Regime Type Affect Credit Rating Agency Ratings in the Developing World?’, International Organization, 61 (2), April, 341–6526. Glen Biglaiser and Joseph L. Staats (2012), ‘Finding the “Democratic Advantage” in Sovereign Bond Ratings: The Importance of Strong Courts, Property Rights Protection, and the Rule of Law’, International Organization, 66 (3), July, 515–3527. Emanuel Kohlscheen (2007), ‘Why Are There Serial Defaulters? Evidence from Constitutions’, Journal of Law and Economics, 50 (4), November, 713–3028. Juan Carlos Hatchondo and Leonardo Martinez (2010), ‘The Politics of Sovereign Defaults’, Economic Quarterly, 96 (3), Third Quarter, 291–31729. Atif Mian, Amir Sufi and Francesco Trebbi (2014), ‘Resolving Debt Overhangs: Political Constraints in the Aftermath of Financial Crises’, American Economic Journal: Macroeconomics, 6 (2), April, 1–28PART IVSOVEREIGN DEBT: THE LONG VIEW 30. Mark Dincecco (2010), ‘The Political Economy of Fiscal Prudence in Historical Perspective’, Economics and Politics, 22 (1), March, 1–3631. Michael D. Bordo (1999), ‘International Rescues versus Bailouts: A Historical Perspective’, Cato Journal, 18 (3), Winter, 363–7532. John Joseph Wallis (2000), ‘American Government Finance in the Long Run: 1790 to 1990’, Journal of Economic Perspectives, 14 (1), Winter, 61–8233. Carmen M. Reinhart and Vincent R. Reinhart (2015), ‘Financial Crises, Development, and Growth: A Long-Term Perspective’, World Bank Economic Review, Annual Bank Conference on Development Economics “The Role of Theory in Development Economics” June 2–3, 2014 Washington D.C., 29 (Supplement 1), April, S57–S7634. Carmen M. Reinhart, Vincent R. Reinhart and Kenneth S. Rogoff (2012), ‘Public Debt Overhangs: Advanced–Economy Episodes Since 1800’, Journal of Economic Perspectives, 26 (3), Summer, 69–8635. Moritz Schularick and Alan M. Taylor (2012), ‘Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870–2008’, American Economic Review, 102 (2), April, 1029–61Volume IIAcknowledgementsPART I THE “LONG” 19TH CENTURY 1. Michael D. Bordo and Eugene N. White (1991), ‘A Tale of Two Currencies: British and French Finance During the Napoleonic Wars’, Journal of Economic History, 51 (2), June, 303–162. Marc Flandreau and Juan H. Flores (2009), ‘Bonds and Brands: Foundations of Sovereign Debt Markets, 1820–1830’, Journal of Economic History, 69 (3), September, 646–843. Gerardo della Paolera and Alan M. Taylor (2013), ‘Sovereign Debt in Latin America, 1820–1913’, Revista de Historia Económica/Journal of Iberian and Latin American Economic History, 31 (2), September, 173-2174. Richard Sicotte, Catalina Vizcarra and Kirsten Wandschneider (2010), ‘Military Conquest and Sovereign Debt: Chile, Peru and the London Bond Market, 1876–1890’, Cliometrica, 4 (3), October, 293–3195. Marc D. Weidenmier (2005), ‘Gunboats, Reputation, and Sovereign Repayment: Lessons from the Southern Confederacy’, Journal of International Economics, 66 (2), July, 407–226. Michael D. Bordo and Hugh Rockoff (1992), ‘The Gold Standard as a “Good Housekeeping Seal of Approval”’, Journal of Economic History, 56 (2), June, 389–4287. Niall Ferguson and Moritz Schularick (2006), ‘The Empire Effect: The Determinants of Country Risk in the First Age of Globalization, 1880–1913’, Journal of Economic History, 66 (2), June, 283–3128. Theodore Roosevelt (1904) ‘President Theodore Roosevelt’s Annual Message to Congress’, delivered December 6th, 19049. Kris Mitchener and Marc Weidenmier (2005), ‘Empire, Public Goods, and the Roosevelt Corollary’, Journal of Economic History, 65 (3), September, 658–9210. Kris James Mitchener and Marc D. Weidenmier (2010), ‘Supersanctions and Sovereign Debt Repayment’, Journal of International Money and Finance, 29 (1), February, 19–36PART II THE 20TH CENTURY IN PERSPECTIVE 11. Barry Eichengreen and Ricardo Hausmann (1999) ‘Exchange Rates and Financial Fragility’ in Federal Reserve Bank of Kansas City (eds.), New Challenges for Monetary Policy, 329–6812. Michael D. Bordo and Christopher M. Meissner (2006), ‘The Role of Foreign Currency Debt in Financial Crises: 1880–1913 versus 1972–1997’, Journal of Banking and Finance, 30 (12), December, 3299–32913. Lyndon Moore and Jakub Kaluzny (2005), ‘Regime Change and Debt Default: The Case of Russia, Austro-Hungary, and the Ottoman Empire following World War One’, Explorations in Economic History, 42 (2), April, 237–5814. Kim Oosterlinck and John S. Landon–Lane (2006), ‘Hope Springs Eternal - French Bondholders and the Soviet Repudiation (1915–1919)’, Review of Finance, 10 (4), 507–3515. Barry Eichengreen and Richard Portes (1986), ‘Debt and Default in the 1930s: Causes and Consequences’, European Economic Review, 30 (3), June, 599–64016. Barry Eichengreen (1991), ‘Historical Research on International Lending and Debt’, Journal of Economic Perspectives, 5 (2), Spring, 149–6917. Peter Boone and Simon Johnson (2014), ‘Forty Years of Leverage: What Have We Learned About Sovereign Debt?’, American Economic Review: Papers and Proceedings, 104 (5), May, 266–71PART IIICRISES OF THE 1980s AND 1990s 18. Paolo Manasse and Nouriel Roubini (2009), ‘’Rules for Thumb’ for Sovereign Debt Crises’, Journal of International Economics, 78 (2), July, 192–20519. Bergljot Barkbu, Barry Eichengreen and Ashoka Mody (2012), ‘Financial Crises and the Multilateral Response: What the Historical Record Shows’, Journal of International Economics, 88 (2), November, 422–35[14]20. Allan H. Meltzer (1984), ‘The International Debt Problem’, Cato Journal, 4 (1), Sping/Summer, 63–921. Jeffrey Sachs (1986), ‘Managing the LDC Debt Crisis’, Brookings Paper on Economic Activity, No. 2, 397–43122. Jeffrey Sachs and Harry Huizinga (1987), ‘U.S. Commercial Banks and the Developing-Country Debt Crisis’, Brookings Paper on Economic Activity, No. 2, 555–60123. Jeremy Bulow (2002), ‘First World Governments and Third World Debt’, Brookings Papers on Economic Activity, No. 1, 229–5524. Allan H. Meltzer (2004), ‘Argentina 2002: A Case of Government Failure’, Cato Journal, 23 (1), Spring/Summer, 29–3125. Eugenio Andrea Bruno (2006), ‘The Failure of Debt-Based Development: Lessons from Argentina’, Cato Journal, 26 (2), Spring/Summer, 357–65PART IV THE RISKS AND COSTS OF SOVEREIGN DEFAULT 26. Juan Carlos Hatchondo, Leonardo Martinez and Horacio Sapriza (2007), ‘The Economics of Sovereign Default’, Economic Quarterly, 93 (2), Spring, 163–8727. Ugo Panizza, Federico Sturzenegger and Jeromin Zettelmeyer (2009), ‘The Economics and Law of Sovereign Debt and Default’, Journal of Economic Literature, 47 (3), September, 651–9828. Michael Tomz and Mark L. J. Wright (2013), ‘Empirical Research on Debt and Default’, Annual Review of Economics, 5, August, 247–7229. Fernando Broner, Alberto Martin and Jaume Ventura (2010), ‘Sovereign Risk and Secondary Markets’, American Economic Review, 100 (4), September, 1523–5530. Michael Tomz and Mark L. J. Wright (2007), ‘Do Countries Default in ‘Bad Times’?’, Journal of the European Economic Association, 5 (2–3), April–May, 352–6031. Edward I. Altman and Herbert A. Rijken (2011), ‘Toward a Bottom-Up Approach to Assessing Sovereign Default Risk’, Journal of Applied Corporate Finance, 23 (1), Winter, 20–3132. Federico Sturzenegger and Jeromin Zettelmeyer (2008), ‘Haircuts: Estimating Investor Losses in Sovereign Debt Restructurings, 1998–2005’, Journal of International Money and Finance, 27 (5), September, 780–805[26]33. Juan J. Cruces and Christoph Trebesch (2013), ‘Sovereign Defaults: The Price of Haircuts’, American Economic Journal: Macroeconomics, 5 (3), July, 85–11734. Miguel Fuentes and Diego Saravia (2010), ‘Sovereign Defaulters: Do International Capital Markets Punish Them?’, Journal of Development Economics, 91 (2), March, 336–4735. Eduardo Levy Yeyati and Ugo Panizza (2011), ‘The Elusive Costs of Sovereign Defaults’, Journal of Development Economics, 94 (1), January, 95–105Volume IIAcknowledgementsPART ITHE CONUNDRUM OF SOVEREIGN DEBT 1. Alberto Alesina and David Dollar (2000), ‘Who Gives Foreign Aid to Whom and Why?’, Journal of Economic Growth, 5 (1), March, 33–632. Alberto Alesina and Beatrice Weder (2002), ‘Do Corrupt Governments Receive Less Foreign Aid?’, American Economic Review, 92 (4), September, 1126–373. Craig Burnside and David Dollar (2000), ‘Aid, Policies and Growth’, American Economic Review, 90 (4), September, 847–684. Robert J. Barro and Jong-Wha Lee (2005), ‘IMF Programs: Who is Chosen and What Are the Effects?’, Journal of Monetary Economics, 52 (7), October, 1245–695. William Easterly (2002), ‘How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief’, World Development, 30 (10), October, 1677–966. Serkan Arslanalp and Peter Blair Henry (2005), ‘Is Debt Relief Efficient?’, Journal of Finance, LX (2), April, 1017–517. Federico Sturzenegger and Jeromin Zettelmeyer (2007), ‘Creditors’ Losses Versus Debt Relief: Results From a Decade of Sovereign Debt Crises’, Journal of the European Economic Association, 5 (2–3), April–May, 343–518. Rutsel Silvestre J. Martha (1990), ‘Preferred Creditor Status under International Law: The Case of the International Monetary Fund’, International and Comparative Law Quarterly, 39 (4), October, 801–269. Raghuram G. Rajan (2005), ‘Institutional Reform and Sovereign Debt Crises’, Cato Journal, 25 (1), Winter, 17–24PART II THE EUROZONE SOVEREIGN DEBT CRISIS 10. Nouriel Roubini and Jeffrey Sachs (1989), ‘Government Spending and Budget Deficits in the Industrial Countries’, Economic Policy, 4 (8), April, 99–13211. Marina Azzimonti, Eva de Francisco and Vincenzo Quadrini (2014), ‘Financial Globalization, Inequality, and the Rising Public Debt’, American Economic Review, 104 (8), August, 2267–30212. Viral Acharya, Itamar Drechsler and Philipp Schnabl (2014), ‘A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk’, Journal of Finance, LXIX (6), December, 2689–73913. Mark Aguiar, Manuel Amador, Emmanuel Farhi and Gita Gopinath (2014), ‘Sovereign Debt Booms in Monetary Unions’, American Economic Review: Papers and Proceedings, 104 (5), May, 101–614. Laurence J. Kotlikoff (2004), ‘Fiscal Policy and the Future of the Euro’, Cato Journal, 24 (1–2), Spring/Summer, 51-515. Jerome L. Stein (2011), ‘The Diversity of Debt Crises in Europe’, Cato Journal, 31 (2), Spring/Summer, 199–21516. Philip R. Lane (2012), ‘The European Sovereign Debt Crisis’, Journal of Economic Perspectives, 26 (3), Summer, 49–6717. Kevin H. O’Rourke and Alan M. Taylor (2013), ‘Cross of Euros’, Journal of Economic Perspectives, 27 (3), March, 167–9118. John Beirne and Marcel Fratzscher (2013), ‘The Pricing of Sovereign Risk and Contagion During the European Sovereign Debt Crisis’, Journal of International Money and Finance, 34, April, 60–82PART III THE UNITED STATES TODAY AND THE FUTURE OF THE INDUSTRIALIZED NATIONS 19. Carmen M. Reinhart and Kenneth S. Rogoff (2010), ‘Growth in a Time of Debt’, American Economic Review, 100 (2), May, 573–7820. Thomas Herndon, Michael Ash and Robert Pollin (2014), ‘Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff’, Cambridge Journal of Economics, 38 (2), December, 257–7921. Ugo Panizza and Andrea F. Presbitero (2013), ‘Public Debt and Economic Growth in Advanced Economies: A Survey’, Swiss Journal of Economics in Statistics, 149 (2), 175–20422. Anja Baum, Cristina Checherita-Westphal and Philipp Rother (2013), ‘Debt and Growth: New Evidence from the Euro Area’, Journal of International Money and Finance, 32, February, 809–2123. Alan J. Auerbach, Jagadeesg Gokhale and Laurence J. Kotlikoff (1994), ‘Generating Accounting: A Meaningful Way to Evaluate Fiscal Policy’, Journal of Economic Perspectives, 8 (1), Winter, 73–9424. Pierre Lemieux (2013), ‘American and European Welfare States: Similar Causes, Similar Effects’, Cato Journal, 33 (2), Spring/Summer, 227–3225. Michael Tanner (2013), ‘Is America Becoming Greece?’, Cato Journal, 33 (2), Spring/Summer, 211–2526. John H. Cochrane (2011), ‘Inflation and Debt’, National Affairs, Fall, 56–7827. Carmen Reinhart and M. Belen Sbrancia (2015), ‘The Liquidation of Government Debt’, Economic Policy, 30 (82), April, 291–333PART IV SOVEREIGN DEBT: CONTEMPORARY SOCIAL AND ETHICAL ISSUES 28. James M. Buchanan (1986), ‘The Ethics of Debt Default’, in James M. Buchanan, Charles K. Rowley and Robert D. Tollison (eds.), Deficit, Oxford, UK: Basil Blackwell, 361–7329. Geoffrey Brennan and Giuseppe Eusepi (2002), ‘The Dubious Ethics of Debt Default’, Public Finance Review, 30 (6), November, 546–6130. Seema Jayachandran and Michael Kremer (2006), ‘Odious Debt’, American Economic Review, 96 (1), March, 82–9231. Albert H. Choi and Eric A. Posner (2007), ‘A Critique of the Odious Debt Doctrine’, Law and Contemporary Problems, 70 (3), Summer, 33–5132. Nouriel Roubini (2002), ‘Do We Need a New Bankruptcy Regime?’, Brookings Papers on Economic Activity, 1, 321–3333. Andrei Shleifer (2003), ‘Will the Sovereign Debt Market Survive?’, American Economic Review, 93 (2), May, 85–9034. Rohan Pitchford and Mark L. J. Wright (2012), ‘Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment’, Review of Economic Studies, 79 (2), April, 812–37 35. Robert W. Kolb (2015), ‘The Virtue of Vultures: Distressed Debt Investors in the Sovereign Debt Market’, Journal of Social, Political, and Economic Studies, 40 (4), Winter, 368–412Index

‘Bob Kolb has assembled this outstanding collection of research articles, which could have been called the Greatest Hits of Sovereign Debt. The future of all people on the planet depends heavily on understanding what really happens when governments borrow. Bringing the body of knowledge of this subject under this umbrella is a masterful and thankless achievement.’