Abstract:
Since the 1990s, economic crises are characterized by the joint occurrence of banking
crises and debt restructuring. The literature has mostly focused on two types of costs associated
with debt restructuring: reputation effects and direct sanctions. However, defaults
also involve costs to the domestic economy. For instance, this occurs since the local banking
sector is usually a major holder of government bonds. Then, defaults could be accompanied
with a crisis in the banking sector and a reduction in the credit available for the private
sector. This dissertation presents a study of the exposure of local financial intermediaries
to episodes of debt restructuring, with special emphasis on the consequences to the private
sector.
Ultimately, the objective of this dissertation is to understand the effects of the governments’
decisions to default or not. In chapter 2, we’ll focus on a static model to study the
interactions between the sectors of the economy and the role that financial institutions play
for the real economy in this context. Latter, we’ll analyze these interactions with a dynamic
model. This new model will explain better the interactions and sequence of events during
recent and past sovereign debt crises.
The dissertation then follows with a chapter of case studies where well-known debt
episodes will be explained using the analytical tools developed in previous chapters. Understanding
the basics of the interactions between sectors of the economy will help us recognize
the main effects that defaults cause to the real economy. Also, it will help us generate policies
to mitigate risks and reduce costs attached to the new features of financial crises observed
during the last few years. In Chapter 5 we will conclude the dissertation with some policy
recommendations and a summary of the main contributions.
