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Selective Default Expectations

Author

Listed:
  • Accominotti, Olivier
  • Albers, Thilo
  • Oosterlinck, Kim
Abstract
Sovereign governments often discriminate between creditors during debt default episodes. This paper explores how expectations of selective default affect sovereign bond trading and sovereign risk premia based on a historical laboratory: the German external default of the 1930s. We exploit a unique feature of the interwar sovereign bond market: identical German government bonds were traded on different creditor countries’ secondary debt markets but investors expected creditors from various countries to be treated differently in case of default. We show that, when creditor countries’ secondary debt markets are integrated, selective default expectations are not reflected in bond yields but affect the volume of bonds traded across markets. By contrast, when creditors’ debt markets are geographically segmented, a large selective risk premium can be priced in sovereign bonds. This premium accounted for up to half of the total risk premium on German external bonds during the 1930s. We establish that creditor countries’ seniority ranks can be explained by their economic power over the debtor government.

Suggested Citation

  • Accominotti, Olivier & Albers, Thilo & Oosterlinck, Kim, 2021. "Selective Default Expectations," CEPR Discussion Papers 16474, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16474
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    References listed on IDEAS

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    More about this item

    Keywords

    Sovereign risk; Debt default; Secondary markets; Creditor discrimination;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-
    • N44 - Economic History - - Government, War, Law, International Relations, and Regulation - - - Europe: 1913-

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