History remembered: Optimal sovereign default on domestic and external debt

Infrequent but turbulent sovereign defaults on domestic creditors were a “forgotten history” in macroeconomics. We propose Bewley model which the government chooses debt and default foreign by balancing distributional incentives versus benefits of for self-insurance, liquidity, risk-sharing. A feedback mechanism links issuance, distribution, decision, risk premia. Calibrated to Eurozone data, is consistent with key long-run debt-crisis statistics. Defaults are rare preceded surging spreads. Debt sells at risk-free price most often lack commitment cuts sustainable sharply.