open economy requests a bailout from an international financial institution, it receives a non-defaultable loan of size G … that comes with imposed debt limits. The government endogenously asks for the bailout during recessions and repays it when … the economy recovers. Hence, the bailout acts as an imperfect state contingent asset that makes the economy better off …

The positive relationship between bank and sovereign credit risk in the Eurozone, the so-called sovereign-bank nexus …, is seen as a major threat for the stability of the Eurozone. This paper explores potential bank-level and country …