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

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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