Sovereign Debt in the Twenty-first Century

How will sovereign debt markets evolve in the twenty-first century? We survey how the literature has responded to the eurozone debt crisis, placing lessons learned in historical perspective. The crisis featured: (i) the return of debt problems to advanced economies, (ii) a bank-sovereign doom loop and the propagation of sovereign risk to households and firms, (iii) rollover problems and self-fulfilling crisis dynamics, (iv) severe debt distress without outright sovereign defaults, (v) large-scale sovereign bailouts from abroad, and (vi) creditor threats to litigate and hold out in a debt restructuring. Many of these characteristics were already present in historical debt crises and are likely to remain relevant in the future. Looking forward, our survey points to a growing role of sovereign bank linkages, legal risks, domestic debt and default, and of official creditors, due to new lenders such as China as well as the increasing dominance of central banks in global debt markets. Questions of debt sustainability and default will remain acute in both developing and advanced economies. (JEL E58, F33, F34, G01, G21, H63, N20)

Automated summary

This article reviews the academic response to the eurozone debt crisis, placing the lessons learned in historical context and emphasizing the continued relevance of debt issues in the future.