Sovereign Borrowing, Sanctions and Yield Spreads

We model sovereign debt in the absence of a bankruptcy code. Threat of trade sanctions and seizure of exports by the lenders are the drivers of enforcement of sovereign debt contracts.The borrower takes these potential actions into account when choosing optimal voluntary default and debt capacity. We obtain a closedform solution for the sovereign yield spreads that depend on the costs of sanctions and seizures of export collateral. Our model predicts that sovereign debt will be renegociated more often and yield higher credit spreads than otherwise identical corporate debt. JEL Classification: G12, F34