We build a model where sovereign defaults weaken banks’ balance sheets because banks hold sovereign bonds, causing private credit to decline. Stronger financial institutions boost default costs by amplifying these balance-sheet effects. This yields a novel complementarity between public debt...

There is a large and growing literature that studies the effects of weak enforcement institutions on economic performance. This literature has focused almost exclusively on primary markets, in which assets are issued and traded to improve the allocation of investment and consumption. The general...

In this paper the two standard forms of international investment in developing countries – debt and foreign direct investment (FDI) – are compared from a finance perspective. We show that the sovereign risks associated with debt finance are generally less severe than those accompanying FDI....

This paper studies the strategic interaction between a foreign direct investor and a host country. We analyse how the investor can use his control rights to protect his investment, if he faces the risk of ‘creeping expropriation’ once his investment is sunk. It is shown that this hold-up...

Conventional wisdom says that, in the absence of sufficient default penalties, sovereign risk constraints credit and lowers welfare. We show that this conventional wisdom rests on one implicit assumption: that assets cannot be retraded in secondary markets. Once this assumption is relaxed, there...

During the last few decades, many emerging markets have lifted restrictions on cross-border financial transactions. The conventional view was that this would allow these countries to: (i) receive capital inflows from advanced countries that would finance higher investment and growth; (ii) insure...

We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks...

This paper compares the sovereign rating performance of a large European based rating agency with the Big Three. Using monthly ratings for 56 advanced and emerging economies from June 1999 to October 2012, we explore if Feri behaves differently with respect to rating levels, propensity of down-...

This paper studies how private banks dealt with sovereign risk before World War I. At that time there was no multilateral institution to bail out borrowers in default and sovereign rating had not yet developed. All the burden of information collection and processing was borne out by individual...