Strategic default helps explain crises in advanced economies, ECB paper finds

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The European Central Bank

The concept of strategic default can help explain the links between sovereign debt and financial market failure, a working paper published by the European Central Bank argues.

In Sovereign risk, interbank freezes and aggregate fluctutations, Philipp Engler and Christoph Große Steffen propose a model of optimal sovereign default for advanced economies, building on models used for emerging economies.

Sovereign debt and financial re-allocation are linked by the use of government bonds as collateral

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