International Finance Discussion Papers (IFDP)
May 2014
Sovereign Debt Crises
Ricardo Correa and Horacio Sapriza
Abstract:
Sovereign debt crises have been recurrent events over the past two centuries. In recent years, the timing of sovereign crises has coincided or has directly followed banking crises. The link between sovereigns and banks tightened as the contingent liability that the banking sector represents for the sovereign grew, as financial "safety nets" became more common. This chapter analyzes the transmission channels between sovereigns and banks, with a focus on the effect of sovereign distress on bank solvency and financing. It then highlights the notable cost to the real economy of the close connection between sovereigns and banks. Breaking the "feedback loop" between these two sectors should be an important policy priority.
Full paper (screen reader version)Keywords: Sovereign default, banking crises, government guarantees, financial safety net, bank regulation
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