2006–2010

Why Does Sovereign Risk Differ for Domestic and External Debt? Evidence from Scandinavia, 1938–1948

Reprint No. 2010:6

Author(s): Daniel WaldenströmYear: 2010 Title: Journal of International Money and Finance Volume (No.): 29 (3) Pages: 387–402
Online article (restrictions may apply)


This study shows empirically that the political costs of sovereign default can differ considerably for domestic and external debt. The analysis uses new evidence from Danish and Swedish bond markets around World War II, a time when markets went from being fully integrated to fully segmented overnight. By linking the exogenous wartime shocks to changes in default costs on domestic and external debt, it is found that these costs explain a significant part of the variation in the sovereign yield spread across markets. The results suggest that governments can choose strategically on which debt, the domestic or the external, to default on, and that this decision hinges on the relative size of the political default costs.


Reference:
Waldenström, Daniel (2010), "Why Does Sovereign Risk Differ for Domestic and External Debt? Evidence from Scandinavia, 1938–1948". Journal of International Money and Finance 29(3), 387–402.

Daniel Waldenström

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Interdisciplinary European Studies

The European Union and the Return of the Nation State

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This book explores the complex and ever-changing relationship between the European Union and its member states. The recent surge in tension in this relationship has been prompted by the actions of some member state governments as they question fundamental EU values and principles and refuse to implement common decisions seemingly on the basis of narrowly defined national interests.

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