We show that financial sector bailouts and sovereign credit risk are intimately linked. A bailout benefits the economy …-financial sector to fund the bailout may be inefficient since it weakens its incentive to invest, decreasing growth. Instead, the … sovereign may choose to fund the bailout by diluting existing government bondholders, resulting in a deterioration of the …

sovereigns and banks for 2007-11, we show that bailouts triggered the rise of sovereign credit risk. We document that post-bailout …

sovereigns and banks for 2007-11, we show that bailouts triggered the rise of sovereign credit risk. We document that post-bailout …

We show that nancial sector bailouts and sovereign credit risk are intimately linked. A bailout benets the economy by … bailout may be inecient since it weakens its incentive to invest, decreasing growth. Instead, the sovereign may choose to fund … the bailout by diluting existing government bondholders, resulting in a deterioration of the sovereign's creditworthiness …

borrowers misprice the option to default with a U-shaped negative pricing error. The myopia discount changes the optimal bailout … policy. Myopia gets punished when the distortions from default mispricing outweigh the future bailout costs, resulting in … procrastinated default and protracted crises. The model shows that (i) myopia is an important determinant for bailout policy, (ii …

We show that financial sector bailouts and sovereign credit risk are intimately linked. A bailout benefits the economy …-financial sector to fund the bailout may be inefficient since it weakens its incentive to invest, decreasing growth. Instead, the … sovereign may choose to fund the bailout by diluting existing government bondholders, resulting in a deterioration of the …