Dallas Fed publication highlights sovereign debt

For immediate release: September 9, 2010

DALLAS—A government will repay its debts only if it faces negative consequences for defaulting, according to the latest issue of the Federal Reserve Bank of Dallas’ Economic Letter.

In light of recent concerns over some European governments’ debt levels, senior research economist Ananth Ramanarayanan examines sovereign debt issues in “Sovereign Debt: A Matter of Willingness, Not Ability, to Pay.”

European policymakers recently announced various aid measures for Greece and other troubled governments, such as loans at below-market interest rates, Ramanarayanan notes.

Ramanarayanan says sovereign debt repayment depends more on avoiding default costs and is less linked to solvency per se.

“Policies such as subsidized loans make governments feel richer and thus more willing to pay debt service than face the costs of default,” Ramanarayanan writes. “More generally, policy measures aimed at preventing sovereign default ultimately need to raise the incentives to repay debt, either by making the payment of debt less costly or raising default costs.”

-30-

Media contact:
Alexander Johnson
Phone: (214) 922-5288
e-mail: alexander.johnson@dal.frb.org