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On the benefits of repaying

September 24, 2021

In the case of sovereign debt, creditor rights are not as well defined as for private debts. This is essentially due to two reasons. First, most sovereign assets are located within the borrower’s jurisdiction and the borrower cannot credibly commit to hand over these assets in case of default. Second, there are legal principles that protect sovereign assets, even when they are located in foreign jurisdictions (sovereign immunity has however been eroded in recent years, see Schumacher et al. 2018).
Starting from these considerations, the economic literature on sovereign debt has focused on the incentives to repay that sustain the market for sovereign debt when enforcement is weak. The main insight of this literature is that, given that countries cannot be forced to repay, they

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