private credit to decline. Stronger financial institutions boost default costs by amplifying these balance-sheet effects. This … increasing the costs of default. We document three novel empirical facts that are consistent with our model's predictions: public … public debt and financial institutions are stronger; in these same countries default is less likely. …

Conventional wisdom says that, in the absence of sufficient default penalties, sovereign risk constraints credit and … enforcement. In the presence of (even arbitrarily small) default penalties, this equilibrium is shown to be unique. As a result … sovereign risk constrains credit, one must show both the insufficiency of default penalties and the imperfect workings of …

's sovereign debt default. While diversification generates risk diversification benefits ex ante, it also generates contagion ex …

the European monetary integration in late 1990s, and (ii) - following the heightened default risk of Greece - the sudden …