The Long and the Short of It: Sovereign Debt Crises and Debt Maturity

Raquel Fernández, Alberto Martin

NBER Working Paper No. 20786
Issued in December 2014, Revised in October 2015
NBER Program(s):   EFG   IFM

We present a simple model of sovereign debt crises in which a country chooses its optimal mix of short and long-term bonds subject to standard contracting frictions: the country cannot commit to repay its debts nor to a specific path of future debt issues, and contracts cannot be made state contingent nor renegotiated. We show that, in order to reduce incentives to engage in debt dilution, the country must issue short-term debt. This exposes it to roll-over crises and inefficient repayments. We examine the effects of alternative restructuring regimes, which either write-down debt or extend its maturity in the event of crises, and show that both necessarily improve ex ante welfare if they do not decrease expected payments to creditors during crises. In particular, we show that the way in which these regimes redistribute payments between short- and long-term creditors, which has been a central point in recent policy debates, is inconsequential.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20786

Users who downloaded this paper also downloaded* these:
Niederle w20788 Gender
Mishkin and White w20737 Unprecedented Actions: The Federal Reserve’s Response to the Global Financial Crisis in Historical Perspective
Bucher-Koenen, Lusardi, Alessie, and van Rooij w20793 How financially literate are women? An overview and new insights
McCaig and Pavcnik w20891 Informal Employment in a Growing and Globalizing Low-income Country
Svensson w20796 Forward Guidance
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us