Official lenders provide financial assistance to countries that face sovereign debt crisis. The availability of financial assistance has counteracting effects on the default incentives of governments. On the one hand, financial assistance can help to avoid defaults by bridging times of...

In the course of the global financial crisis, countries that did not experience a sovereign debt crisis for several decades suddenly faced increasing sovereign default risk spreads as investors started to doubt the sustainability of fiscal positions. Several European countries struggled to avoid...

This paper studies the impact of the state-dependent risk of a government default on the correlation of the scal balance and current account. We use a small open economy model where nonlinear risk premia arise endogenously when the government operates close to its scal limit, i.e. the maximum...