Kohlscheen, Emanuel and O'Connell, Stephen A. (2007) Trade credit, international reserves and sovereign debt. Working Paper. Coventry: University of Warwick, Department of Economics. (Warwick economic research papers).

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Abstract

We present a unified model of sovereign debt, trade credit and international reserves. Our model shows that access to short-term trade credit and gross international reserves critically affect the outcome of sovereign debt renegotiations. Whereas competitive banks do optimally lend for the accumulation of borrowed reserves that strengthen the bargaining position of borrowers, they also have incentives to restrict the supply of short-term trade credit during renegotiations. We first show that they effectively do so and then derive propositions that : I) establish the size of sovereign debt haircuts as a function of economic fundamentals and preferences ; II) predict that defaults occur during recessions rather than booms, contrary to reputation based models ; III) provide a rationale for holding costly borrowed reserves and, IV) show that the stock of borrowed international reserves tends to increase when global interest rates are low.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HJ Public Finance
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Debts, Public, International finance, Debts, External, International economic relations
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	December 2007
Number:	No.833
Number of Pages:	50
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Economic and Social Research Council (Great Britain) (ESRC)
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URI:	http://wrap.warwick.ac.uk/id/eprint/1381

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